Conspiracy of Dunces: Central bank manipulations in crisis

On Monday we discover further evidence that the Bank Of England in 2008 was pressuring banks to manipulate the LIBOR rates lower as a result of the financial crisis.

At the time Mervyn King was the Governor of the Bank of England and his staff were said to be questioning UK banks — including Barclays — about why they were paying such a high rate of interest to borrow money overnight from other banks.

Tape recordings coming to light from the BBC detail a conversation between Barclays manager Mark Dearlove and Libor committee member Peter Johnson saying that the bank must lower its Libor rates because of pressure from the government and the BOE.

“The bottom line is you’re going to absolutely hate this… but we’ve had some very serious pressure from the U.K. government and the Bank of England about pushing our Libors lower,” Dearlove tells Johnson, according to the BBC.

Johnson objects, saying it’ll break the rules for setting the interest rate.

“The fact of the matter is we’ve got the Bank of England, all sorts of people involved in the whole thing… I am as reluctant as you are… these guys have just turned around and said just do it,” Dearlove replies.

The full BBC program will be aired later on Monday.

These recordings back up reports from then Barclays CEO Bob Diamond. In a memo, written on Oct 29, 2008, by Diamond and circulated to two other senior bank officials, said: “Mr Tucker [Deputy Governor of the Bank of England] reiterated that he had received calls from a number of senior figures within Whitehall (which is a reference to the UK government) to question why Barclays was always toward the top end of the Libor pricing.”

These tapes come a week after Federal Reserve Richmond governor Jeffrey Lacker immediately resigned after leaking information on what the Fed was going to release two days later.

Surely this is probably the tip of the iceberg on what central bankers were up to during the financial crisis and beyond.


Fed's July minutes already dated on BOE's cut

On Wednesday the Fed will release its minutes from the July 26-27 meeting.

The central bank was bullish on the June employment numbers and jawboned about still raising rates in its post-meeting statement.

The meeting came before the Bank of England cut rates and moved back on the QE train as a result of the Brexit, so anyone looking to divine a September rate rise from these comments will be advised that the Fed cannot and will not raise rates as Britain just cut.

We have a better chance of Japan devaluing its currency for reasons stated below.

I’ve written before about the yen-carry trade and how important it is for the US markets.

Essentially, large institutional buyers use the yen to purchase US securities, since it is so much cheaper, to gain some additional leverage on the purchase.

Well Monday night in Asia saw a huge strengthening of the yen moving below the 100 mark to the dollar, due to data that was showed slowing growth, which you would assume would weaken a currency not make it stronger. Welcome to Jabberwocky.

As I said yesterday in the August doldrums trading is somewhat thin and reactions muted. US stocks, which generally fall hard on stronger yen — especially when it breaks the 100 threshold — seem to take it in stride down only marginally in pre-market.

Precious metals had a bigger move higher on the news, with gold moving up a little less than a percentage point and silver a bit higher than that on a percentage basis. Crude prices moved higher by $0.25 on the news, but that has more to do with anticipated OPEC cuts, which will not happen.

Markets are unusually jittery for August

There are many one-offs occurring this week in the markets.

Equity markets this week are finding it tough sledding, as stocks can’t find a direction as currency markets are taking the yen back to 101 level, meaning the Japanese currency is getting stronger against other currencies.

This strengthening is generally negative for stocks due to the carry trade, where you buy US stocks with yen to lever up your position.

On Tuesday, the Bank of England came up short as bondholders did not want to part with their longer-duration paper and central banker Mark Carney could not buy enough bonds to cover its allotted purchases for its QE operation. Again this has never happen before.

Precious metals are moving higher this week independent of currency moves. Wednesday pre-market saw silver up 2.5% or $0.50. Gold was only up 0.8% or $12. But if gold makes the same percentage jump as silver you are looking at a spike of nearly $40, which would get some notice at the Fed.

Some will attribute the one-offs as being driven by illiquid, low volume August markets as traders are away from their desks on vacation.

I don’t see that as being much of a factor anymore since most of the trading is done by high-frequency trader’s black boxes.

Let’s say I think this needs to be watched as we move through this month.

Brexit forces BOE's Carney to throw the kitchen sink at it

Markets were flat in the US while awaiting the move by the Bank of England. The central bank cut its interest rate in half to 0.25% Thursday morning and will increase QE.

As the news came out markets were still unsure of how to play the move. After 45 minutes US equities moved higher along with precious metals.

Despite all the talk of England being on the winning side on its decision to exit the EU, BOE President Mark Carney had telegraphed the first move in 7 years to counteract the Brexit vote. Carney is also thought to increase QE to spur economic growth. The BOE cut its 2017 GDP estimate from 2.3% to 0.8%.

The new 0.25% interest rate is the lowest rate in the 322 years of the central bank.

The idea that Carney had to throw the “kitchen sink” at the post-Brexit economy is troubling. To cut 2017 GDP projections by 65% — while Carney says no — suggests a hard-landing recession for the UK beginning now.

History will tell you that QE has little benefit to 95% of the population, since its mainly used to provide liquidity for troubled bank balance sheets.

Market reaction will take some time to play out, but suffice it to say, that equities will rise on this “bad” news.

As England, so goes Yellen

What does the Bank of England’s decision on Thursday to leave its interest rate at 0.5% tell us?

  • There is no economic growth across the pond, same as the US.
  • The UK banks are still not right with their balance sheets and need to be supported and need more time to repair their impairments.
  • Since global central banks work in unison, the Federal Reserve will not raise rates in Sept.

IMF chief Christine Lagarde has told these bankers that 2015 was not the year to raise rates, and yet some still believe there was drama before the announcement Thursday in London.

Taking the playbook for what Fed chief Janet Yellen will say at the September press conference after announcing that rates will hold steady,  BoE head Mark Carney cited a strong British pound and cratering commodity prices as a reason to not raise rates.

The commodity price slide has all central bankers fearful of disinflation, since consumer spending is depressed despite lower fuel costs.

I see it as a global recession with depressed economic growth and investors putting their money into sovereign debt for safe keeping that is behind a stronger pound and dollar.

The two currencies — pound and dollar — are not strengthening on the prospects of future growth, but the fear of a global recession. A huge difference in market psychology.

What’s my proof of a standstill Fed in Sept. off of the BoE rate call? US equities soared in pre-market on the news. Enough said.