The central banks are losing their grip as well as the plot

The last 24 hours have shown an instance of a central bank losing its grip and another losing the plot. This is significant because central banks have been like our overlords in the credit crunch era as they slashed interest-rates and when that did not work expanded their balance sheets using QE and when that did not work cut interest-rates again and did more QE. This made Limahl look rather prescient.

Neverending story
Ah
Neverending story
Ah
Neverending story
Ah

Also in terms of timing we have today the last policy meeting of ECB President Mario Draghi who has been one of the main central banking overlords especially after his “What ever it takes ( to save the Euro) ” speech. Next month he will be replaced by Christine Lagarde who has given an interview to 60 Minutes in the US.

Christine Lagarde shows John Dickerson how she fakes drinking wine at global gatherings.

US Repo Problems

Regular readers will recall that we looked at the words of US Federal Reserve Chair Jerome Powell on the 9th of this month.

To counter these pressures, we began conducting temporary open market operations. These operations have kept the federal funds rate in the target range and alleviated money market strains more generally.

This involved various moves as the overnight Repos found this added too.

Term repo operations will generally be conducted twice per week, initially in an offering amount of at least $35 billion per operation.

These have been for a fortnight and added to this was a purchase programme for Treasury Bills.

In accordance with this directive, the Desk plans to purchase Treasury bills at an initial pace of approximately $60 billion per month, starting with the period from mid-October to mid-November.

Regular readers will recall that I described this as a new version of QE and it has turned out that the Treasury Bill purchases will be larger than the early estimates by at least double.

This theme of “More! More! More!” continued yesterday with this announcement from the New York Federal Reserve.

Consistent with the most recent FOMC directive, to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation, the amount offered in overnight repo operations will increase to at least $120 billion starting Thursday, October 24, 2019.  The amount offered for the term repo operations scheduled for Thursday, October 24 and Tuesday, October 29, 2019, which span October month end, will increase to at least $45 billion.

Apologies for their wordy opening sentence but I have put it in because it contradicts the original statement from Jerome Powell. Because the “strains” seem to be requiring ever larger interventions. Or as Brad Huston puts it on Twitter.

9/17: We’re doing repos today and tomorrow.

9/19: We’re extending repos until 10/10. $75B overnight, $30B term

10/4: We’re extending repos until 11/4

10/11:We’re extending repos until Jan 2020

10/23:We’re expanding overnight repo offering to $120B, $45B term

This reinforces the point that I believe is behind this as I pointed out on the 25th of September

The question to my mind going forwards is will we see a reversal in the QT or Quantitative Tightening era? The supply of US Dollars is now being reduced by it and we wait to see what the consequences are.

This added to the US Dollar shortage we have been looking at for the past couple of years or so. It would seem that the US Federal Reserve is worried about a shortage at the end of this month which makes me wonder what they state of play will be at the year end when many books are squared? Also in terms if timing we will get the latest repo announcement at pretty much the same time as Mario Draghi starts his final ECB press conference.

The Riksbank of Sweden

It has made this announcement today.

In line with the forecast from September, the Executive Board has therefore decided to leave the repo rate unchanged at –0.25 per cent. As before, the forecast indicates that the interest rate will most probably be raised in December to zero percent.

I will come to my critique of this in a moment but we only have to progress another sentence or two to find that the Riksbank has provided its own critique.

The forecast for the repo rate has therefore been revised downwards and indicates that the interest rate will be unchanged for a prolonged period after the expected rise in December.

That is really quite a mess because we are supposed to take notice of central bank Forward Guidance which is now for lower interest-rates which will be achieved by raising them! Time for a reminder of their track record on this front.

As you can see their Forward Guidance has had a 100% failure rate. You do well by doing the reverse of what they say. As for now well you really could not make the bit below up!

If the prospects were to change, monetary policy may need to be adjusted going forward. Improved prospects would justify a higher interest rate. If the economy were instead to develop less favourably, the Executive Board could cut the repo rate or make monetary policy more expansionary in some other way.

QE

Well that never seems to go away does it?

In accordance with the decision from April 2019, the Riksbank is purchasing government bonds for a nominal total amount of SEK 45 billion, with effect from July 2019 to December 2020.

The central bank will keep the government sweet by making sure it can borrow very cheaply. The ten-year yield is negative albeit only just ( -0.03%) although in an undercut Sweden is running a fiscal surplus. That becomes really rather odd when we look at the next bit.

The Economy

I have criticised the Riksbank for pro-cyclical monetary policy and it seems set to do so again.

after several years of good growth and
strong economic activity, the Swedish economy is now growing more slowly.

So they have cut interest-rates in the good times and now seem set to raise them in weaker times.

Next comes this.

As economic activity has entered a phase of lower growth in
2019, the labour market has also cooled down. Unemployment is deemed to have increased slightly during the year.

If we switch to last week’s release from Sweden Statistics we see something of a challenge to the “increased slightly” claim.

In September 2019 there were 5 110 000 employed persons. The unemployment rate was 7.1 percent, an increase of 1.1 percentage points compared with September 2018……In September 2019, there were 391 000 unemployed persons aged 15─74, not seasonally adjusted, an increase of 62 000 compared with September 2018.

If we move to manufacturing then the world outlook seemed to hit Sweden in pretty much one go in September according to Swedbank.

The PMI dropped by 5.5 points in September to 46.3 from a downward revision of 51.8 in August. This is the largest monthly decline since autumn 2008 and was part of the reason why the PMI fell in the third quarter to the lowest level since early 2013.

Comment

The US Federal Reserve is the world’s central bank of last resort and currently that is not going especially well. So far it has added around US $200 billion to its balance sheet and seems set to push it back over US $4 trillion. Yet the problem seems to be hanging around rather than going away as it feels like a plaster is being applied to a broken leg. A gear or two is grinding in the banking system.

Moving to Sweden we see a case of a central bank adopting pro-cyclical monetary policy and now finds itself planning to raise interest-rates in a recession. Yet the rise seems to make interest-rates lower in the future! I am afraid the Riksbank has really rather jumped the shark here. It now looks as if it has decided that negative interest-rates are a bad idea which I have a lot of sympathy with but as I have argued many times the boom was the time to end it.

Sweden has economic growth of 4% with an interest-rate of -0.5% ( 28th of July 2017)

The Investing Channel

13 thoughts on “The central banks are losing their grip as well as the plot

  1. Shaun, this is serious but no wants to discuss it because acknowleging the problems fires and exocet missile back at the CBr’s and Governments who have enjoyed 10 years of reduced borrowing costs… indeed not many mortgage owners are boastful how their interest charges on their home have reduced monthly payments by lets say 1/3rd.

    No one wants to talk about it, no one wants the rates to go up. In fact most of the heavily indebted of course want the cheap money to carry on forever.

    It is of course problematic that “business” has morphed to rentier activity.. such as buying back stock instead of investing in plant and machinery, property facelifts for re-letting of commercial space have been indulged via funny money (WeWork) or the purchase and remodelling of residential for letting is mainly a leveraged untertaking where the poorest in society are footed the exagerated service costs. Lastly of course the banks are actually damaged by negative rates.

    Its a thorny subject, the banks were initially rescued by QE but the dismorphic cousin of lower and lower rates actually quell real investment, proper incentives and true entrepreneurial activity.

    Christine is likely to promote MMT for capital infrastructure but I think Govts ( most of them unpopular) will use MMT for helicopter money.

    • Paul C

      The BOE have accepted there are major problems out there but as you say don’t discuss how to deal with the worlds ballooning debt and agree how to try to solve it.

      The problem is there is no consensus apart from most the heads of banks doing QE and reducing interest rates.

      Quite simply the debts are too high and in a slowing economy there isn’t enough profit to pay down the debts.

      Well that is the way I look at it and the only way is to produce more but that isn’t easy and impossible with a declining global growth.

      The only other way of resolving the ballooning debts is to have defaults.Then start all over again after many feel the pain.

      This is what all the austerity was all about in the UK the pain had to be shared and we are in no better situation than before the financial crisis total UK debt is still higher and now the government are set on more expenditure.

      In the meantime recently announced:

      “It is Mario Draghi’s last rate-setting announcement as president of the European Central Bank and its members have voted to leave the interest rate unchanged.
      The ECB also confirmed that its bond buying programme will start at €20bn a month from 1 November.”

      That is OK then just buy more bonds and the saga goes on and on and on and on!

      German manufacturing still in decline and Nokia warns on profits as well is to add to the woes the world banks face.

      • total global financial savings = total global government debt + total global household debt + total global corporate debt + total global corporate equity.

        If you want to reduce total debt, you have two options: reduce total financial savings or increase total global corporate equity. Increasing global corporate equity will involve a reduction in corporate debt (unlikely to affect any other form of debt), but will involve those (savers) supplying capital to companies in the form of debt capital having to supply it in the form of more risky equity capital. I’m not sure what this would really achieve.

        So, to really bring total global debt under control and reduce it, you have to reduce total global financial savings.

        Any suggestions as to how to do that? Make holding financial instruments less attractive by allowing the returns on them to fall, possibly to zero or lower? Tax savings above a certain threshold at high rates, such as the UK government does with excess pension savings? There’s probably other ways. I’d be interested in hearing your suggestions. Clearly a wave of defaults, or as some suggest, a debt jubilee would work. Defaults and debt jubilees would both wipe out savings and make saving less attractive, but seems a bit extreme!

        • that’s captain Manwaring banking

          what we have is this;-

          Enron Venture Capitalism

          You have two cows.

          You sell three of them to your publicly listed company, using letters of credit
          opened by your brother-in-law at the bank, then execute a debt/equity swap
          with an associated general offer so that you get all four cows back, with a tax
          exemption for five cows.

          The milk rights of the six cows are transferred via an intermediary to a Cayman
          Island company secretly owned by the majority shareholder who sells the rights
          to all seven cows back to your listed company.

          The annual report says the company owns eight cows, with an option on one more.

          • forbin,

            An interesting hypothesis there my friend. I shall give you another one.

            You have 10 cows and you only have feed for one and one dies. You carry on milking the second one until the food runs out and that one also dies.

            I know the above is a simple hypothesis but aren’t we milking the whole financial system and not productive enough to produce feed?

  2. Nomi Prins book ‘COLLU$ION’ is an interesting read on how this mess developed and how central banks have manipulated markets and reshaped economics and geopolitics.
    A revealing and well researched account of how banksters took control of the central banks.

    • Hi regis

      I agree it is an instance of regulatory capture. This is an issue that has been known for quite some time as I recall Yes Prime Minister stating in the early 1980’s that the Department for Education was run by the teaching unions.

  3. The recent panic over the need for the Fed to fund the repo market has been mentioned in some areas as a plan by Wall St banks to force the Fed to buy long dated treasuries(to revert the yield curve) which they previously had loaded up on, (anticipating the re-introduction of QE).
    I don’t know if this was true, but going on their previous record I would say it is entirely believable.

    However the response by the Fed hasn’t been entirely “on message” since they bought more short dated treasuries and bills than longer maturities, perhaps they didn’t get the subtlety of the hint from their Wall St masters or was it maybe a half way move designed to ameliorate the shortage and at the same time show them they weren’t going to be pushed around?

    Meanwhile, in Euroland Draghi bows out after failing to raise rates ONCE in eight years and fully committed to ramping up QE with negative rates already in many countries, passing the buck to a convicted fraudster – oh sorry my bad, only found guilty of “negligence”(with no sentence) Christine Lagarde who has no economic background and a background mainly in politics, doesn’t that fill you with confidence?

    Over here Carney must be crossing the days off his calendar to his leaving date, after presiding over and micromanaging the reflation of the housing bubble, he is now left searching the world for a suitable position – and presumably another country in search of the magic wealth effect only a housing bubble can bring, a replacement is still to be announced, Jerome Powell has presided over a 180 reversal of Fed policy so fast last December that his head must only by now be clearing, but as long as he looks after his bosses on Wall St and continues hollowing out the US economy and destroying the middle class, keeps cutting rates and ramping up QE all should be well, Trump now has as his Chief Economic Adviser one Lawrence Kudlow, a man once so coked out of head that in divorce proceedings, his wife tried to get a court order to freeze his retirement account as she believed he was going to blow it all on cocaine.

    With such a well diversified and qualified crew in charge of our economic destiny what could possibly go wrong?

    • Hi Kevin

      Cheers for the suggestion that the US Federal Reserve has got the hint wrong and bought the wrong securities as that raised a chuckle here 🙂

      As to Mario Draghi I am not great fan of his policies but he was at least in charge of his brief and we only saw real dis-unity at the end. Whereas Christine Lagarde is regarded very differently even by Euro supporters. Frankly she has to anyone who is not wearing blinkers shown herself to be incompetent on more than a few occasions.

      Meanwhile someone has plenty of policy suggestions for the Fed.

      • Hi Shaun,
        What would we do without Twitter! I just love his moniker the REALDonald Trump!!! I suppose that’s to distinguish him from that other DonaldTrump out there – the megalomaniacal, narcissistic nutter who finishes every sentence with an exclamation mark! oh wait…..

  4. Great blog and video as usual, Shaun.
    The Bank of Canada will make an interest rate announcement on October 30 when it releases its quarterly Monetary Policy Report (equivalent to the BoE’s Inflation Report). Today the C.D. Howe Institute’s Monetary Policy Council (MPC) recommended that the overnight rate be left unchanged at 1.75%, although two of the 11 members voted for a drop to 1.50%. However, it also voted for a drop in the overnight rate to 1.50% in April 2020, with three members voting for a 1.25% rate. If you go by their views, which represent what they favour rather than what they believe the Bank of Canada will do, interest rates will be going down within the next six months even if it is unclear when.
    I don’t know if anyone who reads your blog has seen the Bloomberg interview with William White from last month. He is famous for forecasting the Transatlantic fiscal crisis as a BIS economist. He views fiscal policy as having more potential in a downturn than fiscal policy, although he isn’t exactly cheery: “The last refuge of a scoundrel is to try to use that … last [fiscal] room for manoeuvre, recognizing that it’s a window of opportunity” and the same kind of stimulus cannot be resorted to again and again.
    https://www.cdhowe.org/video-and-media-appearances/william-white-bnn-three-central-banks-will-set-worlds-economic-conditions

    • Hi Andrew and thank you

      I was about to reply that maybe the US Federal Reserve will help make the decision for the BoC but I note the timing is rather bad with the Fed’s meeting announcement the same day and crucially later that day. Maybe this time they will both follow the ECB today and stick rather than twist.

      I see you have a minority government rather like us in the UK now….

      • Thank you for your reply, Shaun. Sorry I wasn’t aware that the Bank of Canada and the US Fed were making their interest rate announcements on the same day. I don’t know if you looked at the interview with William White but about the 6:00 mark lovely Amanda Lang (her dad was a Cabinet minister when Pierre Trudeau was PM) asks White if the Bank of Canada was bound to follow other central banks in lowering rates or if it could go its own way. White replies: “The honest truth is there are sort of three central banks that really count: the Fed, the BOJ and the European Central Bank. The rest of us are along for the ride. And that’s the sadness of it.”
        Yes, we have elected a minority government again for the first time since 2008, but Trudeau has a lot easier task than Boris Johnson. The USMCA has not yet been ratified, and the socialist NDP may not vote for it, but the Conservatives surely will. The world’s loveliest Environment Minister, Catherine McKenna, who you saw in the video of an Ottawa Centre all candidates meeting, was re-elected, with no help from our household. My wife voted for the NDP candidate, Émilie Taman, a former crown prosecutor, and I thought she would win, as she really ran the strongest campaign. Taman did finish in second place, but it wasn’t as tight as the polls showed it might be. I voted for Carol Clemenhagen, who you also saw in the video, but the Conservatives are not much of a force in Ottawa Centre. I sent McKenna an e-mail after the meeting explaining why putting mortgage interest rates in a core inflation measure was a bad idea. I was rather hoping she would buy me lunch in the Parliamentary restaurant so I could explain the issue more fully. It hasn’t happened yet. Je garde espoir.

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