Market get mixed message from central banks

Most markets are looking for direction as central banks moved the goalposts over the last 24 hours.

Yesterday Fed chief Janet Yellen said that the central bank now sees an additional rate hike needed for next year as its policies appear to be working.

Laugh at that. The reason Yellen & Co are seeing improvement is because of the expectations of the Trump Administration’s pro-growth business policies.

And just Thursday morning, Bank Of England chief Mark Carney said the central bank will unexpectedly hold rates at 0.25% and will proceed with an $88 billion program of bond buying program because the outlook is far from rosy.

So who is right? Yellen or Carney? Neither?

Dollar strength will rule the day in 2017. So until that plays out growth in the US and globally will be curtailed as China, Japan and other export countries suffer the slings and arrows of currency revaluation.

The UK by beginning the Brexit talks with EU next year will be buffeted by a pound trading lower against the greenback.

The euro could also be trading below par with the dollar in early January as the ECB takes on a two-front war between the UK and its southern flank of Greece and Italy.

So King Dollar will rule the roost during the Trump’s Administration’s honeymoon period, which could hamper the push to keep jobs here in the US.

This makes the need for tax policy reform so much more critically important to get done soonest to stem the call for exporting jobs.


Fed minutes have lasted years

This afternoon we get the Fed minutes from the September “no rate rise” meeting.

I don’t expect to read any serious debate, although it may be framed that way by some chronicling the episode, since the vote only had one dissention.

This way the Fed can point to how veryclose we are to exiting zero-interest, when nothing is further from the truth.

As I wrote yesterday, the economic modeling the Fed is using is perverted by its own actions in the market.

Why after seven years of pumping over $4 trillion into the economy are we still struggling with near zero growth and negative interest rates moving out the duration curve?

Because most of the $4 trillion has not been sterilized. It’s sitting on banks balance sheets in the form of treasury notes, masquerading as an asset for the bank.

This asset can’t and won’t enter the real economy. It can’t be used to raise wages (the principal action needed for inflation). It can’t be deployed as loans to business or homeowners either.

It needs to be sitting on the balance sheet in the form of “proven reserves” to offset much of the toxicity that still festers there.

You just don’t find many “market mavens” speaking on this, since its Wall St.’s dirty little secret.

Deutsche Bank is taking a $6.8 trillion writedown for the quarter. As it brings on a new CEO, the German bank  — some say — is taking a “kitchen sink” approach to clearing out the toxic paper sitting on its balance sheet.

The “kitchen sink” approach is when a new CEO gets one pass to clean things up so you throw everything — including the “kitchen sink” — into the writedown.

However, this is not the first or second or third time the bank has changed CEOs or taken massive writedowns in the past three years. The bank has also recently failed a stress test on its balance sheet by not having enough “proven reserves” to bolster its Greek exposure.

Lastly to recap the two items above. A rise in rates by the Fed, would in all likelihood raise yields on the “proven reserves” sitting on the banks balance sheets. This action would then lower the price of that “asset,” which would further cripple the bank.

So it’s Catch 22, on the rate rise scenario, which no one again talks about.

Loan sharks in Aegean

So here’s what’s it like to pay off a loan shark.

A week later you are in the same hole you were last week.

Turn your attention to Greece.

The EU granted Greece €7.16B payment in which 95 % or €6.8B went to the sharks Greece owed — the Trioka — and the 5% was kept by the Tsipras government.

What will come of next week’s vig?

To put it in context the Greeks have maxed out all their credit cards and are now making half the minimum payment every third month. It’s a recipe for default, but the creditors can handle a default so they extend the terms with no realistic expectation of getting fully paid, but to grab all the late fees they can get.

Also Monday some Greek banks opened to take deposits — as if anyone in their right mind would put money into the system. You can only take out the same  €60 per day though.

There were discussions about be able to take €120 if you wait two days, but that’s still in discussions.

So how is the Greek economy suppose to grow with these capital controls and the treat of a bail in? What business would take a chance in that environment?

Germany likes hippies, no haircuts for Greeks

Greece preps to hear its fate on a bridge loan from EU officials Friday so it can open banks on Monday.

The vote is not a given since the IMF has come out and said that Greek debt levels are unsustainable and that a substantial haircut is needed on the principal amount owed.

It’s Greece’s best last chance to get out from under the burden of a decades-long vassal existence within the euro zone. Unfortunately, it will probably not work out well for Athens, since the Germans are staunchly against a haircut, fearing the rest of southern Europe will come knocking should the haircut be allowed.

Despite this drama, this is the first weekend in a month or so where there is not a vote of measure being voted on in Greece or Brussels.

So let’s take it in and have a good weekend.

Greece debt package crumbles like Feta

The Greek middle is not holding.

The Deputy Finance Minister Valavani resigned this morning. In an open letter to Prime Minister Tsipras, Valavani says it’s not about debt restructuring, it’s about Greeks being able to stay alive after the government passes the measure.

Christine Legarde said Wednesday that the IMF will not be able to participate in this refunding bailout of Greece because the organization cannot participate in loan sharking operations, per its charter.

Lagarde is saying what I have said all along. Greece had debts no honest man can pay, and therefore needs a Marine-style haircut on its debt, before the IMF can become involved. There has to be a possibility of repayment and to be able to grow its economy.

I cannot see how the Greek parliament can pass these draconian measures to enslave their people for decades, with no viable escape from the debt.

One government estimate has the payment on the debt in 2020 will amount to over 300% of estimate GDP. No this can’t work and it should be voted down.

It’s not like re-opening the banks depends on the vote, because there are reports that regardless of the vote outcome, the banks will be closed until August at the earliest.

China released three key economic reports on Wednesday, that all beat the consensus estimates.

  • Retail Sales was up 10.6 percent over last year with expectations of a 10.2 percent gain.
  • Industrial Production rose 6.8 percent beating expectations of a 6.0 percent rise.
  • GDP rose rise 7.0 percent eking past 6.8 percent estimate.  It’s the lowest since beginning of 2009.

Chinese equities took data with a large grain of salt and closed lower on the day, somehow perhaps not believing in the numbers.

So once again the slowing Chinese economy — the biggest fear on the globe — will be pushed aside for the time being as the government numbers have to be accepted until they aren’t.