Sunday, November 2, 2014

Is It Time For New Money - First Japan now EU Money?

( Central banks hurry to panic so that you don’t have to.
That’s one way to interpret the surprise move by the Bank of Japan early Friday to vastly expand its monetary-easing program, which triggered a huge reflex rally in world stock markets and a sharp drop in the Japanese yen against the U.S. dollar.  The BoJ’s gambit is the sort of unexpected gift to investors that central banks have become known for since the financial crisis, as they have amassed more than $10 trillion in assets on their balance sheets.  Yet this time, the policy makers in Tokyo were not responding to damaging turmoil in financial markets that appeared in need of a liquidity lifeline and reassurance.  This might be a new pattern among central banks, which have made such a commitment to supporting world growth and staving of deflation that they feel it’s necessary to act proactively rather than wait for growth fears, credit deterioration and stock-market pressures to become intense before they act.   Michael Block, strategist at Rhino Trading Partners, says, “The Fed is playing stock market as is the BOJ and they freak out when the drawdown is 5%. That seems to be where this all gets started.” For sure, equity market moves are a crude way to measure investor worry, but they tend to mirror erosion in economically attuned credit markets. 
(CERR Investments).  So now it appears Feds new policy is that if the markets decline more than 5% it is time to influence the markets by making a speech that they will not raise rates or they will extend QE4 perhaps and buy more assets.  Market manipulation at its best.  However caution needs to be made if the bluff doesn't work on raising rates and delaying QE4. Only time will tell if the Feds are seriously think of these options.  For now my goals are with the Feds until middle of next year - 2015 when sequester hits and there is a new crop of  budget balancers.  Get ready for more decrease in government spending and more rhetoric on how bad the government is - unless it affects monetary policy. Wait till the market decreases then you will see how good government does work and the equity managers start lobbying the Feds for more free money. 
(Wall Street Journal).  As the Federal Reserve ends its quantitative-easing program, the calls for the European Central Bank to embark on its own full-scale government-bond-buying program grow louder. Many observers concur with former Fed Chairman Ben Bernanke’s judgment that U.S. QE worked in practice but not in theory. In Japan, the world’s most aggressive QE program seems to have worked in neither theory nor practice, leading the Bank of Japan 8301.TO -1.01%  to decide last week that perhaps it wasn’t aggressive enough. Would a eurozone QE program prove any more successful?  Italy is the crucial test. The eurozone’s third-largest economy is suffering from a toxic combination of sluggish growth and government debt of 135% of gross domestic product. It grew by less than 1% a year on average in the years prior to the crisis and now looks likely to slide back into a third recession in six years. Credit conditions continue to deteriorate. If QE can’t rescue Italy, then it can’t rescue the eurozone.  Yet it is hard to see what QE can do for Italy. To understand why, consider the Italian banking system. This is the main channel through which any monetary stimulus must work given Italy is one of the most bank-dependent economies in the eurozone. Bank lending is equivalent to 53% of GDP in Italy, higher than in France or Germany. Bank loans represent 40% of total financial liabilities (equity as well as debt), compared with 15% in the U.S. and 23% in France, according to the Bank of Italy.  Unfortunately, the ECB’s recent comprehensive assessment of the eurozone’s largest banks confirmed what the market suspected: the Italian banking system is the weakest in the eurozone.  The ECB concluded that Italian banks had understated their bad- debt charges by €12 billion ($15.02 billion). Nine out of the 15 Italian banks examined by the ECB had a capital shortfall at the end of December 2013, and four still have a combined shortfall of €3.1 billion today.  This conclusion was a particular embarrassment for the Bank of Italy. The central bank had insisted that it was a highly conservative supervisor that didn’t need external experts to tell it how to do its job. In fact, what the stress tests showed was that Italy’s banking system was, at least until recently, badly under-capitalized and therefore constrained in its ability to supply credit to the economy.
(CERR Investments). So with Italy in mind and a new round of bank test, it will probably be slow for EU to begin a new round of QE.  Who wants to give money to a bank that is badly in debt.  My guess EU will be slow to influence markets as fast as Japan because there are so many more countries in EU that are looking for their own preservation.  Its time to scan the news and search for the moment when there will be a big announcement made in EU on monetary policy.  If not continue to watch the Feds.