I read a great piece by HSBC Chief Economist guru Stephen King that appeared in the Financial Times this morning, Trigger-happy central bankers risk wrecking the recovery, [Note: We often consider things great when they are aligned with one's own world view; which is the case here; as I too think developed world central banks have gotten ahead of themselves.]
Here are some excerpts that I think make great sense:
- Standard economic upswings end with inflation. This one is beginning with inflation.
- Central banks typically raise interest rates to prevent inflation from picking up. They're now thinking of raising interest rates to bring inflation down.
- Higher interest rates are associated with rapid economic growth. Yet the west's economic recovery so far has been arthritic, at best.
- There are few, if any, domestic inflationary drivers.
o Wage growth is modest.
o Money supply growth is insipid.
o On any conventional measure, there's plenty of spare capacity.
- The emerging nations' success has, in turn, imposed a tax on western economies.
- This tax is being paid via an increase in prices relative to wages. Hawkish central bankers would rather the tax be paid via higher interest rates.
- Yet, raising rates may simply squeeze western demand without chocking off eastern inflation.
Today we hear and digest what Mr. Trichet has to say about inflation and interest rates. Hawkishness from Mr. T will likely be rewarded for euro bulls...but with US jobs report tomorrow, it could be an interesting setup...
Black Swan Capital Member Mail:
On our comments about Ireland in yesterday's piece, one of our long-term Members, a very smart and nice man to boot, shared these thoughts with us:
Ireland for example, is still a major wild-card in this dangerous game given the shift in the political landscape on the Island as Irish serfs, those that haven't left to find jobs, are pretty much sick of carrying the burden for their high flying financial wizards' machinations from hell.
Well Jack, as I reside in Ireland I can comment - yes, Ireland is a real wild-card, in that the reality has not sank in yet for the man on the street. The reality that the welfare state must end that high direct and indirect taxes are here to stay, that not alone must be 20b € (14% GDP) deficit be eliminated but private sector banking debt (due to incompetent speculation / greed) must be paid back to EZ banks (per the ECB wishes) with 6.7% interest.
Why did this happen to Ireland - well in conjunction with a culmination of organic growth due mainly from Ireland's export (FDI) model plus the sudden inappropriate change in short term interest rate (Euro introduction) created a credit boom. Germany benefits with exports, EZ banks benefited from wholesale funding while taking on no risk (hiding behind the regulatory system) leaving the risk with Ireland Inc. During this time Ireland esencially discarded all responsibility for its own economic affairs and instead falsely believed now that we were in the Eurozone with the new Euro that these matters would be taken care of. A common misconception was - why do we need an Irish Central Bank as the ECB is running the show. Well we now can answer this !.
My view is that once the general public see that there is no way out of this, bar 10 to 20 years paying back private bank debt (wrongly converted to sovereign debt) the obvious conclusion is a concensus that Ireland must once again re-gain control of their economic affairs. In the short to medium term this may mean attempts to re-negotiate terms, attempts by Europe to introduce financial harmonisation across states supported by a large bond buying fund. In the longer term or shorter should the latter approach fail it may mean Ireland starts a planned exit from the Euro, a re-link to Stg, the sale of insolvent banks and of course a big writedown of debt - aka buyback / default.
While the popular commentry has been Ireland has just laid down and accepted all austerity measures, my feeling is that is going to change and the first installment has happened with the recent general election. The next stage may be a realisation that we can and should be running our own affairs while pondering the question - would life be better out of Euroland - we'll see.
Intermarket Chart View
US Bonds and the buck?
Our friends at the Brogan Group, Bob Brogan and his sons Terry and Rob, have been on the top of the institutional technical analysis heap for many, many years. Bob is one of the true revolutionaries in the technical analysis field. He was creating technical models back at a time when institutional managers who liked that stuff would have to smuggle it into the office, or wait to read it in the safety of their own homes overnight. Bob and his sons produce a ton of excellent research and analysis and provide specific buy/sell recommendations for institutional fund managers; they focus primarily on equities, but often apply their magic to other markets. We are fortunate to get a peak at their research each day.
On Monday, Feb 28th, the Brogan Group said its time to use the rally in 10-year US Note futures, which began on Feb 9th, to get short again. That was another right on the money call, among many, from the Brogan Group. Below is a chart from the Brogan Group with all attendant oscillators and flow indicators:
Bonds got hammered yesterday on the ADP jobs news and growth expectations....interestingly, this may be the start of some much needed yield support for the dollar i.e. lower bond prices = high interest rates....though the correlation isn't always a slam dunk, of late rising bond prices which may have been to ebbing US growth expectations, has been tight of late. Notice the rectangle box on the chart showing bond prices going up as the dollar tanks ...
So, if the Brogan's nailed this one, again, will the dollar get some relief?
If you are interested in learning more about the Brogan Group, you can find them here.