Tag: news

With the recent adoption of explicit forward guidance as a stimulative policy tool by the major European central banks, virtually every major central bank is now using the tool in some form. The potential benefits and dangers of such policies as central bank communications have evolved are unclear as "the form of guidance" matters. As Robin Brooks notes, and is so well illusrated below in the example of the Riksbank's and Norges Bank's 'failures', "[In terms of implications for rates] the jury is still out on how well forward guidance works. What is clear, though, is that markets prefer 'deeds' to 'words'."

Forward Guidance has become extremely important…

As Central bank communications (whether at extremes of policy or not) have evolved dramatically over the past 20 years…

(click image for massive legible version)

Especially intriguing is Janet Yellen's note:

As recently as two decades ago, most central banks actively avoided communicating about monetary policy. According to Janet Yellen, the current Vice Chair of the Federal Reserve who was recently nominated to succeed Chairman Bernanke: “Montagu Norman, governor of the Bank of England in the early 20th century, reputedly lived by the motto “never explain, never excuse”.

 

The conventional wisdom among central bankers was that transparency was of little benefit for monetary policy and, in some cases, could cause problems that would make policy less effective.

Source: Janet Yellen, Speech: “Communication in Monetary Policy”,
April 4, 2013.

We have little historical precedent for judging the efficacy if explicit forward guidance. However, as Goldman Sachs notes, Norway’s Norges Bank introduced a form of forward guidance in 2005, while Sweden’s Riksbank followed soon after in 2007; and so we look to how well their "guidance" has fit reality (or shaped markets at the time)…

Lessons From Forward Guidance Pioneers

Forward guidance is not a policy reserved for only extreme situations. Indeed, well ahead of the global financial crisis and before the “zero lower bound” of policy rates motivated some central banks to explore the role of communication tools to achieve further easing,

Explicit but conservative

The Scandinavian central banks’ form of forward guidance is among the most explicit in nature: both Norges Bank and the Riksbank publish a “policy rate path” several times a year detailing the level of the policy rate expected by the (majority) of the Executive Board of the central bank over their forecast horizon (around three years). In addition, the Scandinavian central banks publish a range of economic forecasts, such as growth, inflation, the output gap and the unemployment rate.

Although the form of forward guidance may be one of the most explicit currently in place, the nature is more conservative: the “policy rate path” is a conditional estimate of future policy rates – based on the economy and market conditions – not a commitment.

With no intention of attempting to “tie their hands” in the way that Fed-style forward guidance aims to do by promising to keep rates “lower for longer” than would normally be the case, Norges Bank and the Riksbank maintain full discretion at all times. Forward guidance in Scandinavia is therefore a pure communication tool rather than an innovation in monetary policy strategy.

Relevant for the ECB?

Scandinavian central banks’ lengthy experience with forward guidance may be more relevant for the ECB’s nascent forward guidance than what one might immediately think. While the ECB’s style of forward guidance is rather vague, stating only that policy rates will remain at current or lower levels for an “extended period of time”, compared to the Scandinavian central banks’ detailed policy rate paths, both the ECB and Norges Bank/the Riksbank maintain full discretion of their policy rates at all times.

This is a crucial similarity. And with a shared fundamental underpinning of forward guidance, the Scandinavian experience may shed light on whether a more explicit form of forward guidance by the ECB, while maintaining full discretion, might help the ECB more effectively influence Euro area money market rates.

Gains from transparency despite discretion

A look at how past shifts in the Riksbank’s published policy rate path have impacted market pricing suggests that changes to the policy rate path can be just as important to shaping forward market pricing as changes to actual policy rates. Because the form of communication at the Riksbank is so explicit, this experience provides a likely upper bound to what can be achieved (e.g., by the ECB) with a fully transparent form of forward guidance that still allows for full discretion.

 

While we do not expect the ECB to adopt much more explicit forward guidance, let alone to actually publish a policy rate path any time soon, the Riksbank experience suggests that the ECB’s impact on market rates may be enhanced by increasing the information available to the market regarding the ECB’s view of future likely policy developments. This could take the form of increasing the length of the ECB’s forecast horizon (currently only between 1 to 2 years) or providing a greater account of the Governing Council’s deliberations.

 

[ZH: While the result is still out, one thing seems very clear from the two charts above… Central bank "forward guidance" appears always and forever overly-confident of their ability (or willingness) to tighten…]

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/QC8qjWwfvyU/story01.htm Tyler Durden

The ironically-named Quality Software Services Inc (QSSI) responsible for the SNAFU that is the Obamacare website’s data hub has, incredibly, been named the new general contractor in charge off repairing the glitch-plagued HealthCare.gov. As The NY Post reports, as if the $150 million so far paid to this UnitedHealth subsidiary for its farcically bad implementation was not enough, the executive vuce president of the firm (Anthony Welters) and his wife were among Obama’s largest personal campaign contributors during the 2008 election cycle (and the firm has spent millions “lobbying” for Obamacare). The cronyism runs deep as the Post also notes, visitor logs show at least a dozen visits between the two by the end of 2012, the most recent information available.

 

The man at the center of the “cronyism”… Anthony Welters

 

Via NY Post,

A tech firm linked to a campaign-donor crony of President Obama not only got the job to help build the federal health-insurance Web site — but also is getting paid to fix it.

 

Anthony Welters, a top campaign bundler for Obama and frequent White House guest, is the executive vice president of UnitedHealth Group, which owns the software company now at the center of the ObamaCare Web-site fiasco.

 

UnitedHealth Group subsidiary Quality Software Services Inc. (QSSI), which built the data hub for the ObamaCare system, has been named the new general contractor in charge of repairing the glitch-plagued HealthCare.gov.

 

Welters and his wife, Beatrice, have shoveled piles of cash into Obama’s campaign coffers and ­apparently reaped the rewards.

 

…

 

The couple have been frequent guests at the White House.

 

Visitors logs show at least a dozen visits between the two by the end of 2012, the most recent information available.

 

The entire Welters family has gotten into the donation game.

 

The Welters, along with their sons, Andrew and Bryant, have contributed more than $258,000 to mostly Democratic candidates and committees since 2007.

 

What’s more, UnitedHealth Group is one of the largest health-insurance companies in the country and spent millions lobbying for ObamaCare.

 

…

 

The insurance giant’s purchase of QSSI in 2012 raised eyebrows on Capitol Hill, but the tech firm nevertheless kept the job of building the data hub for the ObamaCare Web site where consumers buy the new mandatory health- ­insurance plans.

 

QSSI has been paid an estimated $150 million so far, but officials couldn’t say how much more the company might collect on the ­repair contract.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/h3KZCM_am7w/story01.htm Tyler Durden

Paper gold in the developed world may trade based on the whims of marginal momentum chasers, and of course, the daytrading mood of the BIS gold and FX trading desk, but when it comes to physical gold and China’s appetite for it, one word explains it best: unstoppable.

After rising to a gross 131 tons imported from Hong Kong alone in August, which was the second highest ever monthly import tally, September saw a modest decline to “only” 116 tons: “only” because it is still 67% more than the amount imported a year earlier. 

The total gross imports since September 2011 is now a whopping 2232 tons. Why September? Because that is when we posted: “Wikileaks Discloses The Reason(s) Behind China’s Shadow Gold Buying Spree.” The chart below confirms precisely said reason.

The gross imports year to date are now over 1,113 tons, 91.3% more than the amount of gold imported through September of 2012.

Netting out exports to Hong Kong, September was virtually unchanged from August, at 109 metric tons vs 110 a month earlier. In other words, September was tied for the third highest net import month in Chinese history.

And yes, we realize that to western thinking buying more when the price is dropping in explicable: ironically even the vast majority of gold bugs are merely interested in a momentum conversion in and out of fiat, thus treating gold as an investable, fiat-denominated asset and not as a currency. China, on the other hand, continues to show that when one’s only intention is to purchase as much gold as possible to preserve wealth and purchasing power and/or unleash the gold standard back on the world (either alone or jointly with Russia and/or Germany), dropping or plunging gold prices are merely the icing on the cake.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/VCKePCkQ6D0/story01.htm Tyler Durden

Paper gold in the developed world may trade based on the whims of marginal momentum chasers, and of course, the daytrading mood of the BIS gold and FX trading desk, but when it comes to physical gold and China’s appetite for it, one word explains it best: unstoppable.

After rising to a gross 131 tons imported from Hong Kong alone in August, which was the second highest ever monthly import tally, September saw a modest decline to “only” 116 tons: “only” because it is still 67% more than the amount imported a year earlier. 

The total gross imports since September 2011 is now a whopping 2232 tons. Why September? Because that is when we posted: “Wikileaks Discloses The Reason(s) Behind China’s Shadow Gold Buying Spree.” The chart below confirms precisely said reason.

The gross imports year to date are now over 1,113 tons, 91.3% more than the amount of gold imported through September of 2012.

Netting out exports to Hong Kong, September was virtually unchanged from August, at 109 metric tons vs 110 a month earlier. In other words, September was tied for the third highest net import month in Chinese history.

And yes, we realize that to western thinking buying more when the price is dropping in explicable: ironically even the vast majority of gold bugs are merely interested in a momentum conversion in and out of fiat, thus treating gold as an investable, fiat-denominated asset and not as a currency. China, on the other hand, continues to show that when one’s only intention is to purchase as much gold as possible to preserve wealth and purchasing power and/or unleash the gold standard back on the world (either alone or jointly with Russia and/or Germany), dropping or plunging gold prices are merely the icing on the cake.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/VCKePCkQ6D0/story01.htm Tyler Durden

Submitted by Lance Roberts of STA Wealth Management,

As we enter into the two final months of the year, it is also the beginning of the seasonally strong period for the stock market.  It has already been a phenomenal year for asset prices as the Federal Reserve's ongoing liquidity programs have seemingly trumped every potential headwind imaginable from Washington scandals, potential invasions, government shutdowns and threats of default.  This leaves us with four things to ponder this weekend revolving around a central question:  "Does the Fed's Q.E. programs actually work as intended and what are the potential consequences?"

1) Three Questions For Ben Bernanke (via ZeroHedge)

David Einhorn of Greenlight Capital turns his attention to Ben Bernanke with three primary questions:

"We maintain that excessively easy monetary policy is actually thwarting the recovery. But even if there is some trivial short-term benefit to QE, policy makers should be focusing on the longerterm perils of QE that are likely far more important. Here are some questions that come to mind:

 

How much does QE contribute to the growing inequality of wealth in this country and what are the risks this creates?

 

How much systemic risk does the Fed create by becoming what Warren Buffett termed 'the greatest hedge fund in history'?

 

How might the Fed's expanded balance sheet and its failure to even begin to 'normalize' monetary policy four years into the recovery limit its flexibility to deal with the next recession or crisis?"

2) Heal Thy Economy Or Fuel The Next Crisis  (Project Syndicate)

Nouriel Roubini, a professor at NYU's Stern School of Business, plays tag team with David Einhorn questioning the policies and programs of not only the Federal Reserve but of all global central banks.

"As below-trend GDP growth and high unemployment continue to afflict most advanced economies, their central banks have resorted to increasingly unconventional monetary policy. An alphabet soup of measures has been served up: ZIRP (zero-interest-rate policy); QE (quantitative easing, or purchases of government bonds to reduce long-term rates when short-term policy rates are zero); CE (credit easing, or purchases of private assets aimed at lowering the private sector's cost of capital); and FG (forward guidance, or the commitment to maintain QE or ZIRP until, say, the unemployment rate reaches a certain target). Some have gone as far as proposing NIPR (negative-interest-rate policy).

And yet, through it all, growth rates have remained stubbornly low and unemployment rates unacceptably high, partly because the increase in money supply following QE has not led to credit creation to finance private consumption or investment. Instead, banks have hoarded the increase in the monetary base in the form of idle excess reserves. There is a credit crunch, as banks with insufficient capital do not want to lend to risky borrowers, while slow growth and high levels of household debt have also depressed credit demand.

As a result, all of this excess liquidity is flowing to the financial sector rather than the real economy. Near-zero policy rates encourage "carry trades" – debt-financed investment in higher-yielding risky assets such as longer-term government and private bonds, equities, commodities and currencies of countries with high interest rates. The result has been frothy financial markets that could eventually turn bubbly."

 Nouriel's comments touch on a topic that has become much more "mainstream" as of late which questions whether asset prices have once again began to over inflate.

3) 5 Signs The Stock Market Is In A Bubble (CBS Moneywatch)

Larry Fink, CEO of giant money manager BlackRock, clearly thinks the market is frothy.

"We've seen real bubble-like markets again," he said at a panel discussion this week, according to theBloomberg news agency. "We've had a huge increase in the equity markets."

 

Fink and many others are concerned about the impact of the Federal Reserve's "quantitative easing" program, under which the central bank is buying $85 billion a month in government bonds and mortgage securities in hopes of stimulating economic growth. These assets have vastly expanded the Fed's balance sheet, including recently. Since Sept. 4 alone, those balance sheets have increased 4.3 percent, while the S&P 500 has increased 4.9 percent.

In other words, investors are doubling down to capitalize on the cheap money that continues to flood the market."

The financial markets have long been seen as a gauge of future economic activity.   As the stock market rises the economy has also risen.  However, that has not been the case over the last several years with the economy stuck at a sub-par rate of growth.  Today, with the high degree of correlation between the Fed's balance sheet and the financial markets, it is getting increasingly difficult to make the case that the markets are reflecting anything but themselves.

 

4) Why The Fed Can't Taper (Via Pragmatic Capitalist)

Fraces Coppola, proprietor of the Coppola Comment, recently discussed the issues behind the Fed's inability to "taper" its current Q.E. program.

"Tapering is removing central bank support of asset prices. Unless not just the US economy but the GLOBAL economy is "on the up" at the time that tap
ering commences, the result of tapering will be a global fall in asset prices. That isn't going to cause hyperinflation, as the Austrian school thinks, but it would cause a global recession.

 

I'm afraid it is not US fundamentals, but global fundamentals that will determine the Fed's ability to taper. If the Fed tapers when the global economy is already in the doldrums, as it is at the moment, the recessionary rebound to the US economy would be considerable.

 

Because of the US dollar's pre-eminence (and the pre-eminence of USTs, too – we don't talk about that enough), the Fed is effectively the world's central bank. It is high time that the US accepted that its monetary (and fiscal) policies must be driven by the needs of the global economy, not just the US. The 'exorbitant privilege' is an exorbitant responsibility, too."

QE Doesn't Do Much

As I discussed this past week the reality is that the Fed is now caught in a "liquidity trap."  If they begin to remove its liquidity support the markets, and the economy, roll over.  The results would like be quite devastating for investors.   However, continuing to push asset prices higher also will eventually end badly.  It is quite the conundrum for the Federal Reserve and for investors.

While the Federal Reserve continues to push its liquidity programs, the reality is that it does little for economic growth.  Nobel Prize winner Eugene Fama discussed with Rick Santelli how the only thing that really benefits from QE programs, other than asset prices, are the "expectations" of benefits on the economy.  He explains, in the following CNBC interview, that there is really no reason why QE programs would have much economic impact at all.

 

How we got here is one thing.  Apparently, getting out will be quite another.  John Hussman summed this all up well:

"In regard to what is demonstrably true, it can easily be shown that unemployment has a significant inverse relationship with real, after-inflation wage growth. This is the true Phillips Curve, but reflects a simple scarcity relationship between available labor and its real price, but this relationship can't be manipulated to create jobs (see Will the Real Phillips Curve Please Stand Up). It's also true that changes in stock prices are mildly correlated with subsequent reductions in the unemployment rate and higher GDP growth. But the effect sizes are strikingly weak. A 1% increase in stock prices correlates with a transitory increase of only 0.03-0.05% in subsequent GDP, and a decline of only about 0.02% in the unemployment rate. So to use the stock market as a policy instrument, the Fed would have to move the stock market about 70% above fair value just to get 2.8% in transitory GDP growth, and a 1.4% decline in the unemployment rate. Guess what? The Fed has done exactly that. The scale of present financial distortion is enormous, and further distortions rely on the permanent belief that there is actually a mechanistic link between monetary policy and stock prices.

 

We know very well the mechanisms and actual historical relationships between monetary policy and financial markets, and doubt that any amount of quantitative easing will prevent a market slaughter in any environment where investors find short-term liquidity desirable (QE only “works” to the extent that zero-interest liquidity is treated as an undesirable “hot potato”). Still, the novelty of quantitative easing, and the misattributed belief that monetary policy ended the banking crisis, has created financial distortions where perception-is-reality, at least for now. We believe that the modifier “for now” will prove no more durable than it was during the tech bubble or the housing bubble."

It is something to ponder over the weekend.

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/z3oFuW4ocXw/story01.htm Tyler Durden