Central Banks: We Will Keep Doing What Hasn’t Worked And What Won’t Ever Work

Communication Only “Tool” Left

The message on this 4th of July from Central Banks is “we will keep doing what hasn’t worked and what won’t ever work” until it does work.
Case Number One
In central bank case number one Draghi Says ECB Rate to Stay Low for ‘Extended Period’
 President Mario Draghi said the European Central Bank expects to keep interest rates low for an “extended period” as he tries to restrain market borrowing costs, in a new departure for an institution averse to setting policy in advance.
“The Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time,” Draghi said at a press conference in Frankfurt. “What the Governing Council did today was to inject a downward bias in interest rates for the foreseeable future. Our exit is very distant.”  
The ECB chose words over deeds after an “extensive discussion” about cutting interest rates, and the support for the new language was unanimous, according to Draghi. He said the bank kept an open mind on whether to cut the deposit rate below zero.
“The Governing Council had all options on the table this month and will keep them there in case things worsen again,” said Christian Schulz, senior economist at Berenberg Bank in London. “This time, they decided against another rate cut and decided to stage a mini revolution by introducing forward guidance instead.” 
Historically, Draghi and predecessor Jean-Claude Trichet have said that the ECB “never precommits” to any future monetary policy.
Draghi said the reason for taking what he called an “unprecedented” step was the ECB’s expectation that the subdued outlook for inflation will extend into the medium-term amid broad-based weakness in the 17-nation euro-area economy.Case Number Two
In central bank case number two Pound Slumps Most Since 2011 as BOE Signals Rates to Stay Low.

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The Diminishing Effects Of QE Programs

There has been much angst over Bernanke’s recent comments regarding an “improving economic environment” and the need to begin reducing (“taper”) the current monetary interventions in the future.  What is interesting, however, is the mainstream analysis which continues to focus on one data point, to the next, to determine if the Fed is going to continue its interventions.   Why is this so important?  Because, as we have addressed in the past, the sole driver for the markets, and the majority of economic growth, has been derived solely from the Federal Reserve’s programs.   The reality is that such analysis is completely useless when considering the volatility that exists in the monthly data already but then compounding that issue with rather subjective “seasonal adjustments.”
The question, however, is whether such “QE” programs have actually sparked any type of substantive, organic, growth or simply inflated asset prices, and pulled forward future consumption, for a short term positive effect with negative long term consequences?  The 4 panel chart below shows the annual changes of real GDP, employment, industrial production, and personal consumption expenditures.   I have noted the beginning and end of the 3 different “QE” programs.

As you can see during the first round of Quantitative Easing, which was also combined with a variety of artificial stimulus, bailout and support programs, the economy got a sharp boost from extremely depressed levels.  The influx of liquidity stabilized the economy and production levels recovered.   However, it is clear that after that initial boost, subsequent programs have done little other than to stabilize the economy while flooding the asset markets with liquidity.  As shown, even with these programs in play, the current annualized growth trends of the data are showing clear deterioration.  This puts the Federal Reserve in a difficult position of trying to exit support as the economy weakens.

ART CASHIN: I Was Out With My Drinking Buddies Last Night, And We Were All In A Frenzy About This Chart

Here’s what that chart looks like via the St. Louis Fed:

St. Louis Fed

Kyle Bass Hunkers Down: “We Dramatically Reduce Portfolio Risk”

Kyle Bass goes to Japan and finds all as expected…

After traveling through Japan for the past couple of weeks and with their economic experiment at the forefront of the financial press, it is an appropriate time to give an update on Hayman’s current thoughts regarding the island nation. My travels took me from Kyoto, the cultural heart of Japan to Tokyo, Japan’s financial epicenter. I met with all kinds of thoughtful and wonderful people throughout my trip – from tea service with Zen priests in Kyoto to the metaphorical Zen priests of finance in Tokyo. The Japanese people are some of the most inviting, respectful, and thoughtful people with whom I have ever had the opportunity to spend time. There is no doubt that culturally and historically, Japan is one of the richest countries in the world.

Unfortunately, I had this overriding feeling of sorrow and empathy for most of the people with whom I met because my conclusions regarding their potential financial fate were reinforced on this trip. Most large and complex problems do not have a single cause, and there are countless decisions and circumstances that have led Japan to its current situation. While there is no formulaic determination for the solvency of a sovereign balance sheet (despite many attempts to develop one), the inescapability of economic gravity remains constant. Japan and its leadership face an unsolvable equation in my opinion. The structural problems in Japan have existed for years and were evident during our original analysis of the situation in late 2009, but it is fascinating to observe the progression of the decline over time and the recent broad acknowledgement of their plight.

And also learns something new, if not unexpected…

Despite the abundant quantitative data indicating the fragility of the financial system and the risks posed by further indebtedness, very few individuals in Tokyo have expressed a willingness to embrace the difficult choices required to resolve this looming crisis. During my trip to Kyoto, I was introduced to a Japanese phrase that encapsulated the strangely fatalistic viewpoint that many local Japanese market participants have toward the twin threats of debt and deflation. This concept explains a resignation to the unfolding of events and a willingness to submit to this unfortunate reality rather than to fight a seemingly inevitable or impossible challenge. It seems apposite to reprint it here as we watch the beginning of this endgame in the Japanese debt markets unfold:

“Shikata ga nai”

It cannot be helped.

Martin Hennecke – Fed Can’t Phase Out QE, Crisis Not Over

Tyche Group’s Martin Hennecke discusses, How Governments can get out of debt by Inflating and where are now with Gold going much higher in the long term.

Karl Denninger on Bernanke’s Last Stand and Unwinding Rehypothecation