Monthly Archives: January 2014

Cooperative Central Banking

I awoke today to see several global central bank plutocrats (probably fresh from Davos) opine that "the era of cooperative central banking was breaking down." We had posted earlier in the Bernanke/Yellen exchange that "CBs were at core mission domestic institutions" and Yellen would look to re-establish this characteristic.

Regular readers are aware of our system seizure concerns. Put simply, the world is awash in "too many dollars" only until someone wants them. Vince Foster (@exantefactor) has dropped several timely and thought provoking posts on Minyanville as to the movement of Foreign Reserve Custodial holdings at the Fed. These movements have foretold the EM disruptions of last Spring and 2014.

CB fx res

As Gav and Hart indicated in their paper of 2006, "When fed custodial holdings drop countries running large CA/Budget deficits find it difficult to place debts into the system." In macroeconomics- The decline in US CA results in a monetary tightening for the rest of the globe. Suspend your disbelief for a second and consider that the Fed KNOWS THIS.

Tapering, forward guidance and the end of cooperative central banking can be viewed in a new light. OTHERS may find placing debts difficult, but the US finds it MUCH easier. Witness the disappearance of large supply and new FRNs this week alone. "Taper" can be seen as a delicate balance of "benefiting" domestically from the "consequence" of others. The exodus of  custodial holdings results in enough capital market disruption to lower US borrowing costs as the Fed pulls back. Talk about optimal control !

So far, the risky gambit is working. The market adjustments have not cracked the modest growth. Last Spring showed the Fed will up FG and rhetoric when they feel things are getting away from them. The question is, how long will "the others" allow themselves to be tossed around by this game.

 

Classical Friday

30 minute atr
daily pivots
weekly pivots
upside retracements
price extensions
upside price extensions
retracements
short term retracements
regression channels
price support and resistance levels
daily retracement levels
On the economic calendar:-
 
08:30 Personal Income (Consensus 0.2% v Prior 0.2%)
          Consumer Spending (Consensus 0.2% v Prior 0.5%)
          Employement Cost Index (Consensus 0.4% v Prior 0.4%)
09:45 Chicago PMI (Consensus 59.5 v Prior 59.1)
09:55 Consumer Sentiment (81.0 v Prior 80.4)
15:00 Farm Prices
POMO:-
 
10:15 - 11:00 Outright Treasury Coupon Purchases between $3.75 - $4.75 billion
Speaking today:-
 
13:15 Richard Fisher

The Trouble with Stability

Capital and currency markets have broken loose from the Central Bank chains of "stability." We have always been skeptical of the stability policy mandate. Germinated in crisis mentality, stability was the out of chaos objective. The policy took on a global cache' that bloomed into the institutional suppression of the natural state of markets....flux.

Now, when prices adjust, they tend to do it harshly. Playbooks written under the smothering policy mandate are quickly rewritten when "down" predominates the net change. Markets are driven by liquidation. As the movement intensifies, Central Bankers and staffs increase words and even actions to restore the shackles. The entire scenario shows a core distrust of markets.

We would advocate getting the policy settings right and letting the markets do what they do. Exploding equity prices that retreat at the first sign of currency or rate change are, by definition, unstable. Constantly tweaking policy to the change is what race car drivers call "adjusting to the effect." Things are happening too fast to deal with the problem so you tinker elsewhere to restore temporary working balance. The driver knows the actual defect has not been addressed. Market stability is the consequence of proper monetary policy calibration not the objective.

 

Classical Thursday

30 minute atr

daily pivots

weekly pivots

upside retracements

downside retracements

regression channels

price support and resistance
On the economic calendar:-
 
08:30 GDP (Consensus 3.0% v Prior 4.1%)
          Jobless Claims (Consensus 327 K v 326 K)
09:45 Bloomberg Consumer Confidence Index
10:00 Pending Home Sales (Consensus -0.5% v Prior 0.2%)
10:30 EIA Natural Gas Report
11:00 3 Month Bill Announcement
          6 Month Bill Announcement
          52 Week Bill Announcement
11:30 5 Year Note Auction
13:00 7 Year Note Auction
16:30 Fed Balance Sheet
          Money Supply
POMO:-
 
10:15 0- 11:00 Outright Treasury Coupon Purchases between $1.00 - $1.50 billion

This Water Lives in Mombasa

There's a great scene in Out of Africa where they fight diligently to keep the dam from breaking and flooding the coffee fields. The workers knew the outcome but dug and built walls as the deluge raged. Farah, the wise and faithful servant, said to the Baroness as the flood eventually raged, "This water must return to Mombasa, this water lives in Mombasa."

And so it goes with dollars sloshing around in more exotic locales. Native CBs are hiking rates to shore up the leaks but most already know where this is heading. Sooner or later, Meryl Streep says," Let it go." But fight hard they will, 5 point jumps and unexpected moves show the determination. Listen to Farah, this water must go home.