Bernard Hickey details the key news overnight in 90 seconds at 9 am in association with Bank of New Zealand, including news of a wild rally on US stock markets in the last hour of trade on hopes the US Federal Reserve will rescue stock investors with yet more money printing in some form.
The US Federal Reserve has pledged to keep its Federal Funds Rate at or near 0% until mid 2013, but has made no mention of plans for a third round of quantitative easing or money printing to buy US Treasury bonds. However, it did indicate it would use other unspecified tools to revive activity. Stock markets latched onto this suggestion, but bond markets began pricing in a long recession or worse.
US stocks wobbled sharply after the Federal Reserve statement's release at 6.15 am, but the Dow rebounded strongly in late trade to close up 4% or 430 points. The S&P 500 rose 4.75%.
Investors grabbed at comments from the Fed that it had considered alternative policy tools to restart the economy and would use them if needed. The Fed did not specify the tools.
Here's what the Fed said: "The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate."
The New Zealand dollar also moved violently, initially jumping from 81.70 USc to 82.40 USc, then falling back to 80.60 USc, before bolting back to 83.7 USc by 9 am.
The New Zealand dollar has been the most volatile currency in recent days, given it is seen as connected to appetites for risk and to prospects for commodity prices. It has moved in a four cent range in the last two days.
When stock markets are rallying, investors are seen putting 'risk on' such currencies as the New Zealand and Australians. Risk was definitely 'on' in the last hour of trade in New York.
US Treasury markets also rallied (prices up and yields down), but the interpretation of their views is less rosy for the global economy.
The US 2 year Treasury yield fell to 0.2%, while the 10 year bond fell as low as 2.05% after the Fed's comments. That is as low as it got in December 2008 in the depths of the US recession.
Some commentators, such as Karl Denninger at Market Ticker, viewed this as bond markets indicating they saw a Japanese-style multi-year deflationary depression on the horizon for the US economy.
Another view is that interest rates will be held down by central banks and governments while inflation is allowed to run at a higher rate to reduce the real value of the debts weighing down the developed economies. See my comment piece on The Great Repression to come here.
(Updated with closes, Fed comments, charts, NZ$ moveslinks)
No chart with that title exists.
47 Comments
It may seem counterintuitive ...BUT... zero interest rates is very destructive to Capitalism.
There needs to be a "cost of Capital", in order for a Capitalism to properly work.... to properly allocate resourses, to properley price risk...etc.
Banks having access to almost free money is unbelievably destructive.
I think we are witnessing the end of Western Capitalism as we have known it.
cheers Roelof
Bernanke is paid to put the best spin on the situation; and if this was it ,'low growth for longer', that surely isn't good for global prospects And especially US employment figures.. He's saying the biggest consumers are going to stay in hibernation for longer ( probably longer than his 2013, if he's being 'optomistic'). Where does that leave the productive engines of the globe? Slowing and reducing consumption of the raw materials they need to produce. This won't be good.
"cost of capital" funny thing but that same argument is put forward for ETSs, yet they are poo poo'd.
Capitalism, needs a good profit margin to function, or if you will ppl need to see a decent return for the risk if you cannot get that, it wont function....
regards
Didnt we already have a long period of negative rates. Look at the time from 1998 till 2008, housing and asset inflation at %20 while interest rates less than half that. Look at the resources already badly invested. I agree zero interest rates will just hasten whats coming anyway. Lets not forget that there is now a record amount of cash in banks and even at Zero % no one is borrowing, so more of the same should get more of the same result. Its going to shut the economy down. Everyone I know is now in reverse, saving and cutting costs, some to extreme, my wife was at a meeting last night and all the talk was about buying gold, not the environment thats gets good GDP figures. Even my hay contractor has sold a couple of tractors and down sized, he is worried about where our economy is going this has now spread viral and its effect is going to be much more destructive than a few riots in London. Our economy was not built to handle thrift and now its becoming cool, we have a problem. My daughters think its seriously cool to buy from an op shop while my wife drops cothes off around the back. I am really getting into it myself, going to do an oil change on my ute today, then the bike. Cutting the ute of reg as its got to expensive, have to risk nipping down to the store but Im in a rural area and at $600 its criminal anyway and road tax is daylight robbery, I will just use the car.
"Boris Johnson, the Mayor of London, who said
"My friends, as Ihave discovered myself, there are no disasters, only opportunities. And, indeed, opportunitiesfor fresh disasters." Ben Bernanke is living the Boris dreamGeorge Friedman on the global crisis.
"This, then, is the third crisis that can emerge: that the elites become delegitimized and all that there is to replace them is a deeply divided and hostile force, united in hostility to the elites but without any coherent ideology of its own. In the United States this would lead to paralysis. In Europe it would lead to a devolution to the nation-state. In China it would lead to regional fragmentation and conflict.
These are all extreme outcomes and there are many arrestors. But we cannot understand what is going on without understanding two things. The first is that the political economic crisis, if not global, is at least widespread, and uprisings elsewhere have their own roots but are linked in some ways to this crisis. The second is that the crisis is an economic problem that has triggered a political problem, which in turn is making the economic problem worse."
Global Economic Downturn: A Crisis of Political Economy | STRATFOR
I think your right AndyR....this is a huge punt in an extreme environment....there will be consequences for both the winners and losers.
Don't forget there will be interests that say to Bernake or USA ...you can't just stand down interests rates and do nothing....
I think the response will be ...just watch us.
Huge Bluff....but damned if he does....end game if he doesn't.
Being poor for a time won't be so bad............once it is the only acceptable option.
A curiosity to me why those who were shouting from the rooftops the sceaming futility of QE1...QE..2 now behave almost disappointed QE3 has not yet come to pass...
I stayed with no QE3 and now believe the Fed are ready to accept blood on the floor rather than piss into the wind.....
The Question is ....could there be any calculation involved in who's blood is being specifically targeted..albeit there will be collateral damage.
Perhaps economies that are reliant on the USA and Europe to be performing.....
I'll stay with game on Steven.
My quess is that there will be a QEIII ... but I'm also guessing that the Fed believes the mkts will react badly to a QEIII... ie.. The $US will shit itself.
Maybe this will happen before the end of the yr..
Gosh .... the ending of QEII and then then Congress deciding to reduce their deficit shows how vulnerable the US economy is.
I love Richard Duncans commentary... ( He saw what is now unfolding, back in 2004 )
Sounds arrogant.... but John Key and Treasury really have no idea how the American situation will impact Global Trade.
I think the likes of Richard Duncan , who can explain things clearly and simply, make Key and Co. look like fools.
cheers Roelof
And a timeline for what happens next?
http://seekingalpha.com/article/244716-a-possible-market-timeline-to-2015
True, but he only mentions "recovery" and "growth" in the last paragraph. Everything else is pointing out that the markets are going to collapse and we're looking at the next depression. That IMO seems to be on the ball. I don't think peakoil really matters at this point except for it's impact on any possible recovery.
Wow! This Richard Duncan chap hit the nail right on the head, and that was written in 2004! such foresight.....
Yes it seems that the US dollar is doomed .. with rates at near 0% levels, the only next option is QEIII - they will try and create inflation at all costs to get rid of that debt mountain. Perhaps they will succeed to stop the debt levels increasing ... and then reach a point where the dollar stabilizes and then bring back some kind of Gold standard at that point, at a new and lower level.
Can someone please help clarify some confusion around the 'deflationary depression' vs 'great repression' arguments Bernard mentioned in his overview. Both ideas make references to Japan, but whereas the former is clear about deflation, the latter suggests inflation.
It seems that cash is a good option in a deflationary environment, but not so good under the great repression scenario (due to low interest rates and higher levels of inflation).
have I got that right? thanks in advance.....
Here you Go Victoria....http://seekingalpha.com/article/176804-deflationary-depression-the-simple-explanation
It's simplified for a general read.
Auckland digs for the FMA and three new appointments. Here's the FMA's statement:
"The Financial Markets Authority has made three further appointments to its strategic leadership team under Chief Executive Sean Hughes, and announced its new Aucklandoffice premises.
FMA has taken a seven-year lease of level 5, EastBuilding, 52-70 Galway Street, Britomart, which has capacity for more than 50 staff.
“We are very pleased to have secured such a well-appointed and central CBD office location which has the capacity to accommodate FMA’s growing Aucklandteam,” said Mr Hughes. “We begin moving our staff in later this month.”
The new leadership team appointees are:
Diane Maxwell, Head of Stakeholder Management
Ms Maxwell is currently Head of Brand and Corporate Affairs at BNZ. Ms Maxwell has been at the Bank since 2007 when she joined as External Relations Manager. She brings strong strategic leadership capability with senior-level experience in general management, marketing, media, advertising, stakeholder engagement and brand development. Tomorrow, she chairs a session at the Financial Summit hosted by Commerce Minister Simon Power.Ms Maxwell will be based in FMA’s Aucklandoffice. Her start date will be mid-October.
Ms Maxwell’s new role at FMA will provide strategic and operational management of FMA’s wide-ranging communications activities. This will include building effective relationships with a range of market participants and stakeholders including those in government, the financial sector, co-regulators in New Zealandand internationally, the media and the public.
Duncan Smith, Head of Business Performance
Mr Smith is currently Chief Operating Officer at Minter Ellison Rudd Watts. Prior to joining MERW eight years ago, he had CFO roles with KPMG Russia/CIS and TransTasman Properties Ltd in New Zealand, and accounting and audit roles for KPMG in Moscow, Cayman Islands, Budapest and New Zealand. Mr Smith brings a strong commercial background and a commitment to achieving tangible outcomes that contribute to business success to the role. His start date is 12 September. He too will be based in our Auckland office.
Mr Smith’s role will involve him working with his fellow leadership team members to ensure FMA has the organisational performance tools and capability to function effectively and meet its strategic goals. He will oversee human resources, finance, IT and shared administrative services.
Mr Hughes said that an executive recruitment search process will continue for the two remaining roles, that of Head of Enforcement and Head of Market Intelligence.
In the meantime, Nick Williams, a partner at Meredith Connell law firm, will be Acting Head of Enforcement, based in Auckland. He began in 1 August and will remain in this position until a permanent appointment to the role is made.
Nick Williams, Acting Head of Enforcement
Mr Williams is an experienced litigation lawyer, and obtained his CFA designation while working for Citibank Private Bank in Geneva. He has already been pivotally involved in the development and prosecution of a number of FMA’s court cases – particularly in those relating to failed finance companies.
His role will be to oversee the management and development of FMA’s enforcement services and to lead FMA’s team of forensic accountants, investigators and litigation lawyers.
”We are very grateful to Meredith Connell for seconding Nick to support us at this time, and for their willingness to further assist with strategic secondments of two other litigation lawyers over the coming months,” said Mr Hughes.
He said these three further appointments confirmed that FMA was putting in place a highly skilled leadership team with a considerable depth of experience and expertise.
“The Board and I are delighted that Diane, Duncan and Nick have joined the FMA team,” said Mr Hughes."
The Gold market and Stockmarket is forecasting inflation, the bond market looks like deflation ... who is right?
I would say that the USA is following the way of Japan. Japan has tried everything in its power to stop deflation but has been unsuccessful. Perahps Bernanke will succeed, after all, the USA has a growing population, which makes a huge difference.
If there are US stocks out there that yield a good dividend, and Bonds yield practically nothing, then why would you buy bonds? Surely the near 0% rates thing has to be supportive of the stockmarket.
After all this it is time for some light entertainment (thanks blog.themistrading.com).
Einstein dies and goes to heaven only to be informed that his room is not yet ready. “I hope you will not mind waiting in a dormitory. We are very sorry, but it’s the best we can do and you will have to share the room with others” he is told by the doorman.
Einstein says that this is no problem at all and that there is no need to make such a great fuss. So the doorman leads him to the dorm. They enter and Albert is introduced to all of the present inhabitants.
“See, Here is your first room mate. He has an IQ of 180!”
“Why that’s wonderful!” Says Albert. “We can discuss mathematics!”
“And here is your second room mate. His IQ is 150!”
“Why that’s wonderful!” Says Albert. “We can discuss physics!”
“And here is your third room mate. His IQ is 100!”
“That Wonderful! We can discuss the latest plays at the theater!”
Just then another man moves out to capture Albert’s hand and shake it. “I’m your last room mate and I’m sorry, but my IQ is only 80.”
Albert smiles back at him and says, “So, where do you think interest rates are headed?”
cheers christov, kiwipete.
I'm taking from your comments that if Bernanke succeeds with QE we get low interest rates and inflation (Bernard's great repression) and if he fails we get low interest rates and deflation (another depression).
Should've paid more attention in that macroeconomics class.
A pissed Ben Bernanke telling them how it really is!..Im surprised this hasn't gone viral.After nearly knocking over his beer he says the Yanks are in the Shitter for the next generation at least.
http://www.theonion.com/articles/drunken-ben-bernake-tells-everyone-at-neighborhoo,21059/
The Onion - may get cheaper:
http://earlywarn.blogspot.com/2011/08/euro-area-retail-trade-stats.html
Why the euro rises when the ECB prints 800billion but the Dollar falls when Bernanke prints?
"1.If the ECB does not straighten this mess out, there will not be a Euro, or if there is one, it will be a Euro minus some countries. That is of paramount importance.
2.The Fed is simply printing money. In the Eurozone, there is an implied assumption that taxpayers, primary German taxpayers but secondarily French taxpayers will bankroll whatever idiotic thing Trichet does.
Whether the assumption regarding German taxpayers is true or not remains to be seen. The immediate problem is concerns the Euro is about to fly apart here and now"
Someone telling it how it is.
http://www.marketoracle.co.uk/Article29780.html
What's Ron Paul's vested interest though?
'Broadsides: NZ dollar intervention'
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10744148 Could have done with a more appropriate title, like, 'NZ needs policy framework that doesn't lead to currency overvaluation' (Latest Big Mac Index has us at +25%)http://kunstler.com/blog/2011/08/change-you-dont-have-to-believe-in.html
he's a good wordslinger.........
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.