Stuck
in the Monetary Tar Pit
by
Sinclair Noe
DOW
+ 85 = 15,961
SPX
+ 7 = 1798
NAS
+ 13 = 3985
10
YR YLD + .01 = 2.70%
OIL - .04 = 93.72
GOLD + 3.10 = 1291.40
SILV + .04 = 20.88
OIL - .04 = 93.72
GOLD + 3.10 = 1291.40
SILV + .04 = 20.88
Record
highs for the Dow and the S&P 500; with the Dow closing in on
16,000, and the S&P closing in on 1800 or maybe 2000 if you
blink. The Nasdaq is nowhere near record highs but it is close to
4,000 and that's a 13 year high.
It's
rare that the Attorney General discusses an active investigation, but
the New York Times reports Eric Holder is talking about the currency
markets and how some of the biggest banks may have rigged trading in
the largest and least regulated market in the financial world. Holder
said: “The
manipulation we’ve seen so far may just be the tip of the iceberg.
We’ve recognized that this is potentially an extremely
consequential investigation.”
The
investigation still seems to be in the early stages; no one has been
accused of wrongdoing, yet. The DOJ apparently has at least one
trader who is providing evidence, and they have gathered a whole
bunch of emails, instant messages, chat-room conversations, and other
documents. Nine
of the largest banks in currency trading have announced they are
facing inquiries. The banks placed about a dozen traders on leave
pending the outcome of the inquiry. And several banks are considering
limiting the ability of their traders to chat electronically.
And
this all comes on the heels of the Libor rate rigging scandal, the
ISDAfix rigging scandal, and hell, it just seems like everything is
rigged. The currency markets may be the biggest manipulation, at more
than $5 trillion daily, and affecting almost all investments that
must rely on a benchmark in a currency. The
market for buying and selling foreign currencies has
also become a major profit center for many global banks.
Meanwhile,
Moody's the credit rating agency has cut 4 major US banks' credit
rating by one notch. The banks that were cut are: Morgan Stanley,
Goldman Sachs, JPMorgan, and Bank of New York Mellon. Moody’s said
that there was less likelihood of a widespread bailout of banks by
the United States government as there was during the financial crisis
five years ago and that bank debt holders would be forced to shoulder
more of the losses in the future. Moody's also said it expected banks
would be required by regulators in the United States to hold a higher
level of capital, which was likely to result in higher recoveries for
creditors in any future bank default. Maybe too big to fail could
become too big to bail.
In
the ongoing debate over taper or not to taper, we had some
interesting developments this past week. Fed Chair nominee Janet
Yellen has indicated she will continue in the tradition of Bernanke,
maybe even add a little monetary stimulus to the pot of QE, and
although she would like to exit QE, she doesn't seem to be actively
looking for the door.
Meanwhile,
if we look at the targets proscribed for exiting QE, we're nowhere
near an exit. Last week the unemployment rate inched up to 7.3%; of
course, that data was a distorted by the government shutdown and we
may need another month or two to smooth out the data. Meanwhile, a
data point that hasn't received much attention is the PCE price
index, which is at 0.9%, well short of the Fed's inflation target of
2%, and well short of the stated upper limit of 2.5% which might
nudge the Fed to taper.
There
just isn't much inflation. That doesn't mean there is no inflation,
just that the threat of deflation is a greater concern than the
threat of high or even hyperinflation. The core rate, excluding food
and energy prices is 1.2%, which means that food and energy prices
are low or dropping; good news for people who drive or eat food. And
health care prices were only up at a 1.1% annual rate in the third
quarter; I'm guessing that number could move higher in the fourth
quarter. And the Fed has indicated that even if the unemployment rate
falls down to 6.5 percent, they might be in no rush to tighten policy
if inflation remains too low.
And
inflation has been falling in Europe. In France inflation is at 0.6%;
in Germany 1.2%, in Spain 1.3%, in Italy 0.8%, in Britain 2.2%, and
for the entire Eurozone consumer prices rose just 0.7% in the year
through July. The only place inflation isn't declining is Japan,
where it is holding steady, and Japanese policymakers are thankful
for that. Of course Japan has been involved in an experiment known as
Abenomics, which is roughly triple the size and scope of QE on a per
capita basis. Abenomics has been a big boom for Japanese stocks, and
seems to be at least enough to put brakes on the descent into the
deflationary death spiral of the past 20 years.
Let
it serve as a reminder that deflation is perhaps more scary than
inflation, and Abenomics serves as a playbook for how much ammo is
required to fight deflation.
Central
banks are finding it’s easier to push up stock and home prices than
it is to prevent inflation from falling short of their targets.The
greater danger comes when disinflation turns into deflation, which
leads households to delay purchases in anticipation of even lower
prices and companies to postpone investment and hiring as demand for
their products dries up. The Fed and their central bank buddies
around the globe are trying to avert the deflationary danger by
pumping up their economies with lower interest rates and monetary
stimulus. They have bet the run-up in stock and home prices they’ve
engineered would boost consumer and corporate confidence and spur
faster growth and higher inflation. Now they’re having to maintain
or intensify their aid, running the risk those efforts do more harm
than good by boosting equity and property prices to unsustainable
levels. The danger is that someone actually looks at asset prices and
says, “hmm, seems a bit steep.” Party over.
One
of the overlooked aspects of inflation is the velocity of money.
Right now, in the US, money is knee deep in a tar pit. The velocity
of money is how fast a dollar changes hands and is circulated through
the economy. Right now it stands at 1.58, the lowest rate of velocity
in 60 years, below average, and down from 2.2 just 16 years ago.
All
the central bank easy money lacks punch because the pipes that carry
the cash to the rest of the economy are clogged. And that means the
Fed's policies have not had the desired effect of creating a robust
economy. So, the more important question is not whether the Fed will
continue with QE, but what can they do to unclog the pipes; and if
they can't do that, what tools do they have to bypass the process.
Bernanke
has expressed his exasperation with the lack of fiscal policy, and
Yellen made similar overtures this week. What we haven't heard is
that there are some things the Fed could do to provide more direct
stimulus (and it all goes back to increasing demand). And until such
time as money starts to move again, there is little immediate risk of
inflationary pressures.
