THE BEST LAID PLANS

Remember quantitative easing?  Sure you do.  That was the last Really Good Idea to prevent financial collapse when you reached a point when interest rates were at zero or below and nothing was going on.  How does it work.  Simple.  You fold the economy with cash by the method of having the Central Bank buy everything out there and anything that can be issued to, in the case of the Fed, over $4 trillion and about half that for the ECB.  In this country we used to have what we called the "Bond Vigilantes" who kept things honest through the operation of the markets, but with the entry of the guy that makes the money, discipline evaporates and as we have seen over the past few years, government is run through "continuing fiscal resolutions"--don't need no damn budget...free money!  

So what happens when things begin to look better economically and the reason given for this activity seems to be lessening.  One would think that the activity should cease, right?  Not so fast my friend because it seems that as some of us have been suggesting and as reported in the WSJ the other day it may not be so easy.  In fact, it may be quite difficult, unsettling and perhaps dangerous to markets.  Consider this yet again: $4 trillion is a lot of jack, Jack.  When you start spreading that kind of size in any market there is going to be a reaction, but more importantly, let us not forget that the geniuses that created Dodd/Frank imposed substantial liquidity AND capital requirements, forcing in the first case financial institutions to hold the most liquid of assets...govvies or govvie backed paper while at the same time charging them for the privilege.  Then, just to make sure they got it ALL wrong, you can't trade the damn things for your own account.  Bye, bye liquidity. Now dump a trillion or two...which is why no brighter light like Billy the Dud was heard musing that maybe the Fed will only unload 50% of its holdings as if this bright bulb has a clue as to what the right number might be.

The Fed has a bit of dilemma but at least the assets in question are of similar quality.  Shift thoughts to Over There where the assets held by the ECB are definitely not of the same quality, so, in a far less liquid market even as compared to the compromised market Over Here, who buys what and at what price?  Mario, I suspect, is in no rush to normalize but I'll but a Euro to a Drachma that with the uptick in the economic outlook the clamor from the less concerned, Germany, Netherlands, etc. will begin to build.  Of course, if everybody could just agree to a common fiscal policy and a real central bank....anyway the whole thing seemed like a good idea at the time.  Then again, so was freely operating markets.  The bit about tangled webs wasn't a bad thought either.

SHOWTIME

It starts tonight in Cleveland the home of the Indians who haven't won this thing since 1948 and the Cubbies who haven't won it since 2008.  Now I lover football, both the American version and what we call Over Here soccer, but if you have never watched a World Series game in person, you have missed something special.  Every move (or non-move for that matter) is nerve-wracking.  The tension is brutal and the hardest thing in sport...to hit a round ball with a round piece of wood...becomes even more difficult given the pressure especially when EVERY pitcher is throwing at about 95 MPH even if he never do so before in his life.  It is The Show.

Anyway, Mr. Carney met with The Lords today and remarked that folks were getting a bit too wound up over the perils of BREXIT which immediately put a bounce in the Pound.  Thanks Mark, so bloody much.  Might have been a bit more useful if you hadn't been part of the gloom and doom brigade a few months back, but finding religion at any time I guess is a good thing.  More interestingly, the Gov of the Bank of England gave the pretty clear impression that a continuation of QE, whilst certainly not out of the question, may not be the all-curing economic medicine that so many had claimed it to be.  Mr. Carney has fallen right in line with his colleagues who, feeling the heat from various political factions around the world, seem to be collectively coming to the conclusion that the less people see of them the better and while not exactly hot-footing it away from drowning the world in liquidity, certainly seem prepared to take a break as pacemakers and allow someone else to carry the load for a while.

Those of course are the politicians, starting in this country where in the normal Democratic tradition Hillary is prepared to throw scads of taxpayers money at anything in the hope of making it work better (and build the size and scope of government) while The Donald happily pronounces that he loves debt.   Wherever one looks, politicians seem to be backing away from any thought of austerity which if not terrifying in itself now should be!  It sort of strikes me that we are all on a road that somewhere ahead, around a bend is a toll booth, and that toll is going to be a hell of a big one.  But I keep saying that so I guess I'm getting boring and--admittedly--cranky.   Then again, that happens to a Yankee fan who is trying to figure out how the dickens the Cubs and the Indians made it to the show. Who are these guys anyway?  Eight o'clock tonight in the Mistake by the Lake.  PLAY BALL!

CONSENSUS EMERGING?

Whether it is a correct view or not, the markets seem to be ready to convince themselves that there will be a change in global central bank policy with, if not an across-the-board tightening (is 1/4% tightening?) then certainly a slow-down in liquidity creation which has been going on for the past ten years.  Consequently, bond took a hit again today with the ten year actually reaching 1.82% before falling back and the Bund is continued positive territory for a good solid stretch now.  But, at the prospect of having the champaigne pump turned off, equities suffered despite a couple of decent earnings reports from entities other than banks in what has been an otherwise disappointing earnings season.

What will be interesting this week will be what signals we get from the Bank of England who, having been on the wrong side for most of the summer may, it seems, be ready to indicate that a continuation of Mark's Mound of Money Making just may slow considerably despite what was indicated just before BREXIT and reiterated since then.  If this is the case, things could really begin to move rate-wise which will be good for.....who...or is it whom?

Well, I as you might guess, fells it will be good for everybody provided the central banks get out and stay out of this thing so that some real values might be identified.  Problem is there will be a few disruptions, particularly in the equities markets, but coming after the election is determined will have less political influence except for the fact that whoever wins will feel the immediate need to fill the space with fiscal stimulus which is of course even worse than the monetary kind---OK, we can argue that--and which deafens any cry and hence need for the economic restructuring that is so desperately needed everywhere.  By this time next year the United States will owe in  public securities well over $21 Trillion and that is a lot of jack, Jack.  Will there be a reaction in markets?  Little Paulie says no.  Me. I'm not so sure but I don't have a Nobel.  Then again, Lil' Paulie has been telling us that Obama Care is a roaring success for the past seven years.  He has been silent on the subject lately and the President of Colombia just won the Peace Prize for a deal his people rejected.  So you tell me?  Who has more creds around this place?

Anyway, back to banks and perhaps another consensus thought.  The big boys, Citi, B of A and JPM all be the street estimates by a rather healthy margin whilst the Savings and Loan Stagecoach got whacked as expected.  The interesting thing, however, is the WHY not the WHAT that caused the success which caused so many sighs of relief and a rediscovered confidence in the system.  Trading.  Yep, that awful business that Dodd/Frank and Crazy Lizzy & Co. wish to obliterate.  We'll talk more about that later but for the moment do you think that there might be a way to build a consensus that maybe--just maybe--trading ain't a bad thing.  In fact, in more ways than one it might be a very good thing.  Perhaps we'll start tomorrow.

UNCLE BUCK

My Uncle Buck was a French-Canadian from Massachusetts.  Simple guy with simple likes and dislikes.  He liked to fish.  Didn't like much else but boy, could he fish!  I didn't realize it until a few years back but Bucky could have made one of the world's great central bankers.  He had a simple approach to any problem:

                                         "If it doesn't work, get a bigger hammer."

Mario Draghi announced today that the 800 billion or so Euros that constituted his first Quantitative Easing go-around probably hadn't made that much of an impact so he was probably going to do it again towards the end of the year...and oh yeah, he was thinking about the issue of negative interest rates a bit more.  And so, a world sloshing about in liquidity gets a bit more which is certain to change things.   Sure.

The moment the equity boys got a whiff of these goings-on, up went the indexes.  It is so predictable as is the follow-up from the talking heads on "the basic soundness of the economy, blah, blah, blah." So I asked myself today, "I wonder what Uncle Buck would do?"

Well, for sure, he's give it a few whacks with the biggest hammer he had.  But he was a fisherman and a fisherman knows that there are a lot of things that go into putting a fish on the bottom of a boat.  It's called "fishing" not "catching" for a reason.  He'd move location, change baits, change presentation until he found some combination of things that worked.  He was good at what he did and he knew it but he never believed he knew it all.  He used to say, "Every time I go out I learn something new," and most importantly he would admit that, "Sometimes, you have to drop the hammer before you break the thing."

Today's central bankers seem to learn very little as they stumble from one hackneyed solution to the next, swinging the same old hammer they have been using for years.  The engine hasn't started despite repeated blows.  Drop the hammer.


Still feel lousy but eleven hours of sleep really helps.

BERKLEY BLUES

The Berkeley (pronounced BARK-LY) hotel is a lovely, newer (under 100 years old) place just off Knightsbridge, close to Horrods and the Tube station.  Used to have a wonderful dining room in which I found myself one night with a rather over-served Scot when Her Maj and entourage arrived.  The discussion suddenly became loud and one sided concerning the "English Queen," which brought silence to the room and my abrupt departure.  I avoided confrontation in my younger, more intelligent days.

Anyway, last night the old place hosted a conference at which the principal speaker was ECB big shot Benoit Coeure which had been arranged by a hedge fund in cooperation with the London School.  The audience?  Bankers and Hedgies of course.  It may not have come as a surprise but it was certainly a confiration when ol' Bennie Heart announced the the ECB was going to speed up its QE program so as not to get stuck in the mid-summer slowdown which as we have discussed is endmic throughout Europe.  Nothing wrong with that really, but when this is being done in the midst of Carre d'angeau (it used to be the best in town) and the remarks don't get released until this morning there is a chance--just a chance mind you--that the 99% of the market that gets the word 12 hours late might get a tad upset, especially if the Euro crashes at the opening and bonds find a rocket ship on which to take a ride.  "We must do better," said the ECB later in the morning.  No kidding.

We have a saying Over Here;  not ready for the big leagues which means you had best have him practice real hard somewhere else before you send out Bennie to bat for the side.  It would be especially important I think with the memory of the 400 billion blood bath that the markets took just a few short weeks ago but it's over, a lesson has no doubt been learned which isn't all a bad thing.  The problem is, various observers and scribes, desperate never to be wrong may be learning the wrong lesson from all of this to wit that this is the final signal that rates are going up sooner rather than later.  May I present an alternative view.

What struck me was not the anticipated reaction in the market at the news but the apparent recognition and concern on the part of the Bank that by July or August there may be no bonds for sale in order for it to complete its program.  Sure, activities slow in the summer especially in Europe, but never to the point that the ECB couldn't buy 60 billion in bonds or some number close to that.  They are not concerned about the holidays, they are concerned about the liquidity of the entire marketplace which was a major factor in the rout of last month and is looking no better today.  Then of course there is Greece with yesterdays follies having been proven to be just that looming as a dark shadow over the best of plans.

The moral of this tale?  Hell, I don't know but it just seems to me that there is some pretty fuzzy thinking going on out there and some pretty lousy execution at the same time.  Maybe there always has been but I think we used to do better.  I hope the spring lamb hasn't changed.  The had a hell of a souflee for dessert too.  I'll have to find someone who was there and get a report.

I THINK I MISSED SOMETHING

Well, Mario did his thing to the tune of about 60 billion Euros a month until September, 2016 or more if inflation doesn't hit his 2% target.  It's actually a bit less than 60 billion because that number includes the asset purchase and covered bond programs that already exist but who's counting.  As expected, the Euro fell like a rock, stock markets and broad advances and all the world proclaimed that this was the next best thing to sliced bread.  Our global financial universe was once again at peace except that I remained confused as to why the yield on 10 year Italian bonds trade 30 basis points through the 10 year treasury.  Uh?  Riddle me that one Bat Man.

The remarkable thing about this money dump is that it is based upon the belief that Quantitative Easing worked in the U.S. and Japan.  Japanese exports went up because it trashed the Yen but Japan's internal economy didn't do a damn thing because, structurally, it's loonie toons.  When implemented Over Here, the economy was on a long, slow upturn and inflation had already reached somewhere between one and two per cent depending upon who one believes.  Then too, the target was never inflation but job growth which is part of the Fed's dual mandate or so the Fed believes it to be and low and behold, jobs are now right where they were in 2007 which is explained as 16 million NEW jobs created in the past five years. Only problem is the population of the country has grown by 35 million in the mean time.  Such is how we define success.  But back to Mario.

This program was rather carefully crafted to avoid the mine field of Euro politics which can be explained as be The Dutch and The Germans.  Essentially, the program will be run through the individual central banks with 80% of the risk remaining with the purchasers.  The ECB will share only 12% and in regard to EU agency issues there will be full sharing or the remaining 8%.  Angie agreed but Angie was not happy.  So, off we go in March into coo-coo land but every politician in Europe is as happy as a pig in *&^% because the entire mess is on the broad shoulders of the ECB and they don't have to do a damn thing.Oh yeah, Greece doesn't qualify until July because owes the ECB a few billion that they don't have which is repayable in two installments ending in July not to mention the IMF and other assorted creditors.  And in Greece today...

The head of the Syriza, the projected winner of Sunday's elections announced along with his projected finance minister, a committed little Communist whose name escapes me, that they probably will not be paying much of what they owe and screw the EU who wont have the stones to do anything  lest it give the Italians and the Spanish bad thoughts.  They may be right.  Of course if that happens...

But let's say it is all sweetness and light at the end of the day.  Just how is this thing going to play out.
IMHO, badly or at least without much of an improvement.  The liquidity created is coming Over Here of course assuming things don't go to crap between now and March.  The buyers of the debt who will once again be the Euro banks will be looking over their shoulder at a trillion or so Euros owned by something that looks Russian and the last thing they will want are bloated balance sheets and more loans.  No pump priming for them.  Everyone will make believe the Greeks are in compliance and the internal numbers will continue to stink.  But it will be calm, and the markets like calm.  But everyone is saying that it will be a success.  Can Everyone be wrong?  I think I missed something.