Michael Every: “Are You Sitting Uncomfortably? Then I’ll Begin”

Submitted by Michael Every of Rabobank

Fed-y Tales

Are you sitting uncomfortably? Then I’ll begin.

Once upon a time in a land far away there was a happy kingdom. The King did kingly things in the court, with the best interest of his people in mind; the land was rich and the peasants grew more food each year; the cloth-makers made finer cloth each year; the shoe-makers made finer shoes; the merchants traded the surplus with other lands, and all was well. When the economy ran too hot and wages began to go up too fast, the wise Master of Coin would raise interest rates to keep things cool; and when the economy was too cool, the wise Master of Coin would lower interest rates to warm things up; and all was well.

Then one day an evil giant stomped down from the hills, squashed the King’s brave guards in their shiny armour, and then the King, and made himself ruler instead. Everyone had to work for the giant. And he was hungry: most of the food that was grown went to feed his voracious appetite, and the peasants only had gruel no matter how hard they worked the land; all the cloth that was spun was used to make giant garments; and the shoe-makers had to make giant shoes while their own feet were bare. The merchants were now bringing goods in to feed the giant, and the kingdom was deeper and deeper in debt, which the giant made the people responsible for.

The wise Master of Coin–who was wise enough to have kept his job through fulsome praise of the new ruler–noted that production was still running hot on the surface: all had jobs and much was being produced! So he raised interest rates. This did not bother the giant one bit,…but it did not help the struggling people at all. They groaned under the strain.

So the wise Master of Coin then realised that the actual economy was running cold, not hot! He cut interest rates: down and down and down they went, even to less than zero. (Which was dark magic, some muttered.) Again, the giant wasn’t interested – he just wanted to be fed and clothed and shod. And again, the people who were forced to serve him and hand over the fruit of their clever hands, didn’t benefit at all.

The Master of Coin simply didn’t understand that what had worked so well under the King didn’t work when a giant was holding the people under his control. Of course, he was living well as the giant gave him all his leftovers and old handkerchiefs. But everyone else lived unhappily ever after.

The End

Yes, children, the Fed has just held rates, as expected, and it has shifted towards a more dovish tone consistent with a 25bp rate cut next month, if needed, and perhaps even more before the end of the year, though they are obviously keeping their options open. (Please see here for more details from Philp Marey.)

In short, last meeting the Fed was “patient” and now suddenly it’s not. What is the creative excuse for this U-turn? “Uncertainties”. Well, there’s a fairy tale for you! The only uncertainty out there relative to six or seven months ago is the US-China trade situation, and for now things are looking up (relative to a few days ago anyway): perhaps if the G20 goes well rates won’t be cut? What the wise Master of Coin fails to recognise, of course, is that when major structural changes in the economy occur, like a giant, monetary policy no longer works as it once did: indeed, we believe that even if the Fed does move, it still won’t be enough to prevent a downturn in 2020.

From a US rates perspective consider this: if the Fed do cut ahead then yields fall, more so at the shorter end; but if they don’t cut then yields still fall, but more so at the longer end (now around 2.02%). Either way US (and global) yields are going to fall – which tells its own sad story.

In a related fairy tale, social media is buzzing with “the end of the US Dollar!” memes after Facebook announced that it will be launching its own electronic currency, the Libra. Personally I think they missed a trick and it should have been Virgo (Virtual and Go); or Capricoin. Yet when one looks at the proposed structure–the Libra is backed by actual currency like USD and to be run by unaccountable techno-wizards–perhaps Crapricorn would be more appropriate. As someone noted yesterday, in the old days one deposited money in a regulated bank and expected interest; now we are supposed to deposit money in an unregulated website and get no interest. Yay disruption! Indeed, for a company that has been publicly accused of not looking after private data, it’s brave to claim they are ready to look after cash. Furthermore, with the political winds already blowing against Facebook anyway on other fronts for being too powerful–and money BEING power–isn’t this Libra issue likely to create even more problems for it?

In short, the shift in Fed tone–and geopolitics, as Bloomberg reports White House officials are briefing there are links between Iran and Al Qaeda, a fairy tale last used in 2003 before the Iraq war–is creating talk about a weaker USD. Yet we are not there yet, not by a long way, and especially not for EM FX.

That particular green giant is still sitting on them all, and the US will no doubt do all it can to make sure it stays like that, happily ever after or not.

via ZeroHedge News http://bit.ly/31GH6TP Tyler Durden

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