Before we head for summer and the endlessly looming, over-covered fall election, let’s take a moment.
Consider the desperate measures the four most powerful central banks have taken this year to push their artisanal money policies to the limit, keeping markets, banks and (in their minds only) economies afloat through artificial manipulation, stimulation and value fabrication.
This year’s central-bank interventions have exhibited more of a bipolarity than ever before. Speeches indicate one view one minute, another the next. What is said publicly for global consumption and privately for national intake varies. Infighting is escalating within their hallowed walls at monetary-policy meetings. The Federal Reserve is trying to keep it all together, but cracks in the façade of the stability it is selling are growing wider and appearing with greater frequency. Volatility can be contained intermittently, not forever.
FOLLOW THE RHETORIC
As I’ve discussed, this phase began when the Fed raised rates a smidge at the end of 2015, and then backtracked after realizing it couldn’t control the Armageddon that would eschew in the event of an actual tightening policy. Following an 18 percent stock-market drop in the Standard & Poor’s 500 from December 16 through February 11, and a dismal January, Chairwoman Janet Yellen equivocated. Global economies, she maintained, remained too weak (like this was new). The other three central banks quickly fell into line, offering rate reductions, bond-purchasing programs and required reserve reductions for national banks.
The result? By April 18, the Dow Jones had risen above 18,000 points for the first time since July 2015. Since mid-February, the S&P 500 leapt 15 percent.
China got big points in the business press for showing 6.9 percent annual GDP growth for 2015, though it was the worst result in 25 years. (That’s still impressive relative to other emerging countries. China is doing better than people think: Its government and central-bank pockets are deep.) European Central Bank head Mario Draghi (aka “Super Mario”) unleashed an overdrive monthly-buying spree, expanding the ECB’s quantitative-easing program 33 percent (from 60 billion to 80 billion Euro per month) and inviting corporate bonds into the tent. The Bank of Japan followed the ECB into negative interest-rate territory, and like the ECB, began expressing the bizarre view that negative interest rates will do what zero rates couldn’t.
When all was said, but not done, a few new and more desperate themes poked above the parapet of the three major non-Fed central banks. Monetary policy is great, but it’s not enough. Oops… fiscal policy must follow. To me, this signals the last act of The Artisanal Money Show has begun. The blame game will take us to final curtain. Fade to black.
ANY END TO THIS GAME?
So how long can this show go on? Will global financial systems crack and liquidity die? Or will the Fed and its cohorts keep it going, as the little people get sucked into a false sense of last-minute security — until it all comes crumbling down? I think the latter; the issue, as always, is timing. The bases are loaded with QE and ZIRP and NIRP. Will the Fed hit it out of the park before things come crashing down? Will pinch hitters from the other three teams do the deed?
Or will the game be rained out — and we do it all over again tomorrow?
Stakes are high, because the beginning of this year showed what happens if just one player, one major central bank, doesn’t do its part.
What’s ahead for the rest of 2016?
The answer lies partly in two back-to-back events that took place in Washington (naturally) in April. The first was a last-minute, non-public, no-transcripts-disclosed meeting between Yellen and President Obama. There was no mention of the meeting on the Fed’s website’s “All Press Releases” section. Announcement of the 3 p.m. Monday meeting at the Oval Office was made by the White House on Sunday night. (Vice President Joe Biden also was scheduled to attend.)
The second was a joint press release two days later from the Fed and Federal Deposit Insurance Corp. It effectively indicated that seven of the eight systemically important (“too big to fail”) US banks would need another HUUGE bailout (as opposed to the cheap money that lubricates them now) in a crisis.
Let’s dig a little deeper.
On April 11, Yellen attended an unscheduled “secret” meeting with Obama at the White House. The markets and business media launched into overdrive speculation mode as to what it could mean. The Fed offered no explanation.
The White House posted a vague morsel, claiming the encounter was (bold mine):
“..part of an ongoing dialogue on the state of the economy. They discussed both the near and long-term growth outlook, the state of the labor market, inequality, and potential risks to the economy, both in the United States and globally. They also discussed the significant progress that has been made through the continued implementation of Wall Street Reform to strengthen our financial system and protect consumers.”
None of that sounds like something that can’t be discussed on the phone — or through email or even text message — except the passage in bold, which is a complete lie. Here the plot thickens. The most recent byproduct of the extensive coddling of the banking system has morphed into a political tool for extending the Clinton-Obama-Clinton administrations.
Here’s how I imagine that conversation really went:
Obama (clears throat): Can you keep this party going through November?
Yellen (shoulders raised towards ears): I don’t know. We’re coordinating policies. The ECB and Bank of Japan are fully on board. The Chinese, I’m not so sure.
Obama (nods): We’ll handle the Chinese. They’re afraid of Trump. And the banks?
Yellen (huddles in, whispering): You mean the report.
Obama (lifts eyebrows): Uh. Does it mean anything?
Yellen (looks away): They don’t like paperwork. We gave them until next year — unofficially.
Obama (smiles): Good. Let Hillary deal with it. My legacy rocks. We done here?
Yellen (sweat beads forming on her forehead): Yes, Mr. President.
On April 13, two days later, the FDIC and Fed noted that five of eight “systemically important” US banks had failed to deliver adequate 2015 (and legally required as per the Dodd-Frank Act) living wills — or “resolutions” in the event of another financial crisis.
The Board of Governors of the Federal Reserve System and FDIC jointly determined that (bold mine):
“Each of the 2015 resolution plans of Bank of America, Bank of New York Mellon, JPMorgan Chase, State Street, and Wells Fargo was not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code, the statutory standard established in the Dodd-Frank Wall Street Reform and Consumer Protection Act.”’
They gave these five firms until 1 October 2016 to address their “deficiencies.” But, they have until 1 July 2017 to file another living will. (Perhaps that will occur by the time Trump submits his audited tax returns; who knows?) But more likely, they will be given a clean bill of health in October into the general election to complete the fantasy of the Fed and Obama administration fixing the crisis, economy, Wall Street and the universe.
The agencies also identified weaknesses in the 2015 resolution plans of Goldman Sachs and Morgan Stanley. The FDIC determined Goldman Sachs’ plan “was not credible or would not facilitate an orderly resolution.” The Fed concurred for Morgan Stanley’s plan. If you’re keeping score, that’s seven of the eight banks that could re-crater the economy.
Who’s left? Both agencies identified shortcomings for Citigroup to address. Yet, they gave the firm — at which Bill Clinton’s Treasury secretary, Robert Rubin, had a plum position in the buildup to the 2008 crisis, as did Obama’s current Treasury secretary (and deputy secretary for Hillary Clinton when she was secretary of state), Jack Lew — the only thumbs up. Citigroup. That’s what they’re going with. We’re screwed.
TREND FORECAST: The Fed won’t raise rates in June because it can’t afford the possible political repercussions domestically and internationally. Banks will magically appear healthy in October around earnings time. Volatility will increase as the election approaches due to bets on what the Fed will do and because nothing’s truly fixed. Again.
PEOPLE’S BANK OF CHINA — THE DAY AFTER
Then there’s China. After the G20 Finance Ministers and Central Bank Governors Meeting April 14 and 15 in Washington, the People’s Bank of China issued this public statement:
“The global recovery continues and the financial markets have recovered most of the ground lost earlier in the year since our February meeting in Shanghai. However… uncertainties to the global outlook persist against the backdrop of continued financial volatility…”
China isn’t thrilled with playing backup to the Fed’s monetary-policy initiatives, being joined at the hip to the Fed or being chastised for considering concerns of its own economy over the needs of the US. It never has been. As such, the bank added:
“We reiterate our commitments to using all policy tools — monetary, fiscal and structural — individually and collectively to foster confidence and strengthen growth… We will resist all forms of protectionism. We will carefully calibrate and clearly communicate our macroeconomic and structural policy actions to reduce policy uncertainty.”
TREND FORECAST: China will continue to have debt and leverage problems, but will keep the Yuan stable against the dollar to avoid dealing with US complaints of “manipulation” and will talk its markets up when it can.
JAPAN A WEEK LATER
Back in Tokyo, Haruhiko Kuroda, governor of the Bank of Japan, submitted his Semiannual Report on Currency and Monetary Control on April 20.
Kuroda accentuated the falsehood of economic recovery being based on negative rates.
“Japan’s economy has continued its moderate recovery trend.”
(The Bank of Japan has been saying the economy is “recovering at a moderate pace” since 2009.) Taking the Fed and ECB’s side, he stuck it to China a bit, adding:
“However, since the turn of the year, global financial markets have been volatile against the backdrop of the further decline in crude oil prices and uncertainty such as over future developments in emerging and commodity-exporting economies, particularly the Chinese economy.”
Kuroda confirmed that his bank’s “Quantitative and Qualitative Monetary Easing With a Negative Interest Rate” policy would continue, “in combination with continued large-scale purchases of Japanese government bonds,” known as JGBs.
He added that the BOJ “will not hesitate to take additional easing measures in terms of three dimensions — quantity, quality and the interest rate” if necessary.
TREND FORECAST: The Bank of Japan will do what it says, keeping rates negative and buying JGBs, which should depress the yen from its recent elevation against the dollar in the near future.
CENTRAL BANK DISSENSION
Finger-pointing between central bankers and their governments, and internal dissension, will grow.
In Europe, Germany Finance Minister Wolfgang Schäuble has been the main critic of the ECB’s and Draghi’s “flexible” monetary policy. Angela Merkel has been politically cautious on this issue, noting it is legitimate for Germans to discuss interest rates and effects on German society, but “that shouldn’t be confused with interference in the independent policy of the ECB, which I support.” Playing both sides is not a sign of confidence in the ECB, but insecurity about her own political future.
As Schäuble publicly expresses concerns about Draghi’s god complex, Draghi is fighting back.
On March 17, he held a private meeting in Brussels at which he conveyed to European Union leaders that the ECB has “no alternative” to its recent rate cuts and monetary-policy decisions. To the press, he covered his ass and stuck it to Schäuble, saying, “I made clear that even though monetary policy has been really the only policy driving the recovery in the last few years, it cannot address so
me basic structural weaknesses of the eurozone economy.”
TREND FORECAST: Europe is a hot mess. The banks of Portugal and Italy, in particular, are on life support. Trading desks are figuring out how to trade the other side of the ECB’s corporate bond-buying program, which could mean a London-Whale-type scenario, where corporate bond spreads do the opposite and widen dramatically.
At the Fed, there will be more grumbling, as Yellen keeps finding new reasons to keep the current policy. When the Federal Open Market Committee released its March 16 statement about keeping rates where they were, only Fed member Esther L. George was against the decision. The following week, Yellen faced more internal opposition. Four of the 17 members (including George) openly disagreed with her dovish strategy.
Undaunted, at a March 29 speech at the Economic Club of New York, Yellen announced that for the next few months, the Fed’s strategy would be to pursue only gradual increases in federal fund rates, showing a dovish perspective. That was two weeks before the Obama meeting. The meeting and timing signaled the beginning of the end of coordinated central-bank policy. But for now, we remain in play.
TREND FORECAST: We have said that at the most, the Fed would raise rates by 50 basis points this year in, at the most, two 25-basis-point increments. But given the election situation and volatility accentuation of other central-bank leaders, I now think we’re looking at one 25 basis-point move this year at the most. This means the US stock market will trade in a volatile range until the election. TJ