WD: There is a way to solve the drug problem. Make everything legal and dismantle patent laws. Or we could just keep going along our current path of freeDumb.
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Saxo Bank Warns
"This Is The Endgame For Central Banks"
"This Is The Endgame For Central Banks"
Submitted by Tyler Durden:
- Why oh why do we trust central banks?
- Central bankers are politicians' puppets
- This is endgame for the central banks
I fully understand the rationale for the move (Jakobsen: SNB move is rationality itself) but like most of the market I'm extremely disappointed in the SNB’s communication and handling of the issue, but that’s the bigger lesson: Why is it most people trust or bother to listen to central banks?
Major central banks claim to be independent, but they are totally under the control of politicians.
Many developed countries have tried to anchor an independent central
bank to offset pressure from politicians and that’s all well and good in
principle until the economy spins out of control – at zero-bound growth
and rates central banks and politicians becomes one in a survival mode
where rules are broken and bent to fit an agenda of buying more time.
Just looks to the Eurozone crisis over the past eight years – if
not in the letter of law, then in spirit, every single criterion of the
EU treaty has been violated by the need to “keep the show on the road”.
No, the conclusion has to be that there are no independent central banks anywhere! There are some who pretend to be, but not a single one operates in true independence.
Let's get real — central bankers aren't autonomous. Pic: Jakob Ammentorp Lund
That’s the reality of the moment. I would not be surprised to find
that the Swiss Government overruled the SNB last week and the
interesting question for this week is of course if the German government will overrule the Bundesbank on quantitative easing to save face for the Eurozone? Probably….
The new dimension of central banking is the “communications policy” which is not only the poorest policy but also only really a front for “talking the market into believing our dream” without any further action.
Look at the Federal Reserve forward-looking guidance:
They are constantly over-optimistic on growth and inflation.
Constantly. The joke doing the rounds is that to get the proper GDP and
inflation forecast you merely take the Fed's own forecasts and deduct
100-150 bps from both growth and inflation targets and voila! You have best track record over time.
Studies shows that the business cycle was less volatile before the Federal Reserves was born. The
birth of the Fed meant leverage (gearing) which of course has resulted
in bigger and bigger collapses of the economy, but with a trend of major
crashes increasing in frequency: 1987 stock crash, 1992 ERM crisis,
1993 Mexico “Tequila crisis”, 1998 Asian crisis and the Russian default,
2000 NASDAQ bubble, 2008 stock market crash, and now 2015 SNB, ECB QE,
Russia and China and what's the next crisis?
I don’t know, but clearly the world of finance and the flow
of money is increasing its velocity meaning considerably more
“volatility”. By the way, the only guarantee I issued at the end of 2014 looking into 2015 was:
Where does this all bring me? The
SNB's action was really the culmination of bigger and bigger moves at
the end of a low volatility paradigm. I have been trading currencies for
more than 30 years, Thursday’s move was single biggest move I have
experienced in one market. But let’s look at other remarkable moves this
year:
Oil has dropped more than 50%
Source: Bloomberg
Russian ruble falls off a USD cliff
Source: Bloomberg
EURNOK had it biggest move in many, many years (15% in space of a few days)
Source: Bloomberg
EURCHF move in comparison:
Source: Bloomberg
Even overnight, the Shanghai index dropped more than 7% – the biggest move in years on margin calls:
Source: Bloomberg
The lesson is clearly that the market has been trying to
tell us for a long time that volatility was a function of an economic
model of suspending the business cycle. When you suspend an economic
system such as the world markets for an extended period you ultimately
release more energy when the business cycle starts anew.
We started the year with Maximum Dislocation of the market in a model of planned economies.
We have bond and credit spreads at historic lows, currencies at
extremes, equities and real estate in bubble-like valuations, and a
geopolitical risk which keeps rising as seen this year in Paris, last
year in Ukraine and also the rise of ISIS.
The US dollar is putting pressure not only on US itself but also the world.
A journalist asked me last week: Who benefits from a stronger US
dollar? I still owe him an answer because very few benefit. In fact the
world has two growth engines: The US and emerging markets. Both are
pretty much US dollar economies. Debt (US dollar funding) in EM has
exploded to an extent that many including the World Bank now call a for
risk of “Perfect Storm in EM”. Both US and EM became credit junkies over
the QE-to-infinity era in the US. The law of unintended consequences.
Another unintended consequence was that energy was the
trigger for the crisis in 2008 as rising energy prices took five
trillion US dollars out of the economy – which became the catalyst for
the Eurozone crisis and US banking bailout. Now eight year later the
drop in energy has broad spillover effects as the wealth is transferred
from sovereign wealth funds in resource countries to consumers.
That’s good for Main Street and bad for Wall Street as the “bid” in
the assets disappear as these sovereign buyers needs to draw down on
their wealth instead of buying overseas assets. Similarly, will a direct
impact from SNB not having a floor be less NASDAQ buying which famously
SNB had in its portfolio?
Meanwhile the fact that volatility is rising, the fact that we see
early signs of the business cycle being activated, is good for the real
economy. It’s a sign of money flowing from the 20% QE induced overvalued
listed companies to the 80% SMEs (the real economy) as increase in
volatility will make expected return less in “paper money” and more
attractive in tangible assets and good business.
The world should be concerned when volatility is too low,
it’s a sign of the market not allocating money correctly. The one lesson
everyone needs to learn is that for a market based economy to function
you need to allocate capital to the highest marginal real return of capital. Not to the most politically connected.
When history of 2015 is written I have no doubt that the Paris
terror act and SNB's removal of the floor will stand out – both happened
less than two weeks into 2015, although that is random, what is
not random is that market volatility has been rising directly and
indirectly through a misallocation of capital directed by the central
bank system.
Endgame for central banks – no more tools, no more options. Pic: iStock
Many central banks will envy the SNB for its move last week, as it
at least tries to regain some control of its future, but the conclusion
remains: central banks have as a group lost credibility and
when the ECB starts QE this week the beginning of the end for central
banks is completed. They are running out of time – that’s the real real
bottom line: the SNB ran out of time, the ECB will runout of time this
week, and the Fed, Bank of Japan and the Bank of England ran out of time
in 2014.
What comes now is a new reality – the SNB move was
a true paradigm shift – we can no longer look at central banks, the
markets and extend-and-pretend in the same light as we did last
Wednesday (the day before the SNB pounced).
The king is dead, long live the King.
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