Coppola Comment: Creeping nationalisation
From Frances Coppola:
…the super-safe backstop offered to money funds by the Fed is only the latest in a long line of implicit government guarantees propping up the financial system. Far from ending government support of the financial system, the developments of recent years have actually made it MORE dependent on the state.
Markets, too, have become government-dependent. Markets watch central banks all the time, anticipating their actions and responding to their announcements. And exceptional monetary policy by central banks has impacted market functioning. QE reduced the supply of safe assets, raising their price, while the additional money flowing into markets as a result of QE blew up bubbles in various other classes of asset, both safe assets gold, commodities, fine art and above all real estate and high-yield assets. It is hard to say what market prices would be like now if no central bank were doing QE, and we are unlikely to find out any time soon: the US is withdrawing QE, but Japan is currently doing the largest QE programme it has ever done and the ECB may also soon be forced reluctantly to do some form of asset purchase programme. China has been doing yuan QE for a while, but if dollar liquidity becomes an issue it may be forced to repo out its USTs, which would reinforce the Fed’s ONRRPs and make control of dollar liquidity more difficult. And of course the Swiss have been quietly controlling the Swiss franc market for ages. To prevent the Swiss franc rising, they’ve done the largest QE programme in the world relative to the size of their economy….
Read more at Coppola Comment: Creeping nationalisation.
Pimco’s El-Erian: Markets Trading at ‘Very Artificial Levels’ | WSJ
Steven Russolillo at WSJ reports:
Actions by central bankers across the globe are propping up asset prices to artificial levels that are potentially putting investors at risk, Pimco CEO Mohamed El-Erian said in an interview with the Wall Street Journal.
“Investors should recognize that in virtually every single market segment, we are trading at very artificial levels,” El-Erian told WSJ’s Francesco Guerrera. “It’s true for bonds, it’s true for equities. It’s true across the board.”
This reinforces my long-term bullish outlook for gold. Central banks are unlikely to cease their easy money policies any time soon. What we are currently witnessing is the opposite, with the Bank of Japan going ‘nuclear’ in an attempt to kill persistent deflation that has dogged them for over two decades.
I strongly recommend that you watch the video interview at Pimco’s El-Erian: Markets Trading at ‘Very Artificial Levels’ – MoneyBeat – WSJ.
Global QE
Observation made by Philip Lowe, RBA Deputy Governor:
Since mid 2008, four of the world’s major central banks – the Federal Reserve, the ECB, the Bank of Japan and the Bank of England – have all expanded their balance sheets very significantly, and further increases have been announced in a couple of cases. In total, the assets of these four central banks have already increased by the equivalent of around $US5 trillion, or around 15 per cent of the combined GDP of the relevant economies. We have not seen this type of planned simultaneous very large expansion of central bank balance sheets before. So in that sense, it is very unusual, and its implications are not yet fully understood……
A lack of money isn't the problem: it's time to shrink – The Drum – ABC News
Alan Kohler: Debt was built up through 30 years of current account imbalances after currencies were finally unshackled from the gold standard in 1971, and the depression of the 70s came to an end in 1982.
Central banks, principally the Federal Reserve, complied in the process of debt build-up by holding down interest rates and allowing asset prices to rise, keeping balance sheets in the black.
The credit crisis of 2007-08 brought asset prices down rapidly and rendered banks suddenly insolvent, so they had to be recapitalised by governments. Now the governments of Europe, the US and Japan are insolvent, and the only question is when the central banks will monetise their debt – that is, print more money and buy their debts…..
The economy’s lousy but stocks still look good – Barry Ritholtz
Central banks are flooding the market with liquidity. It is hard for stocks not to go up, despite lousy economic data.
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Barry Ritholz on Yahoo.com
Living In A QE World | Jim Bianco
Central banks are ruling markets to a degree this generation has not seen. Collectively they are printing money to a degree never seen in human history.
So how does this process get reversed? How do central banks pull back trillions of dollars of money printing without throwing markets into a tailspin? Frankly, no one knows, least of all central banks as they continue to make new money printing records.
…..When/If these central banks go too far, as was eventually the case with home prices, expanding balance sheets will no longer be looked upon in a positive light. Instead they will be viewed in the same light as CDOs backed by sub-prime mortgages were when home prices were falling. The heads of these central banks will no longer be put on a pedestal but looked upon as eight Alan Greenspans that caused a financial crisis.
Quantitative Easing!!! – Andy Lees, UBS | Credit Writedowns
The BoJ announced today that it will expand its asset purchase programme by JPY5trn (USD66bn), with all the purchases being directed at JGB’s. Add that to the GBP75bn (USD120bn) by the BoE, CHF50bn (USD57bn) by the SNB and the EUR341bn (USD477bn) expansion of the ECB balance sheet since the end of June, and it collectively adds up to USD720bn. Clearly this explains the market rally from the low.