Opinion

The Great Debate

from The Great Debate UK:

How central bankers have got it wrong

If you asked someone to list the chief qualities needed to be a good central banker I assume that the list may include: good communicator, wise, attention to detail, clear thinking, credibility, and good with numbers.  However, in recent months these qualities have been sadly lacking, most notably last week when the Federal Reserve wrong-footed the markets and failed to start tapering its enormous QE programme.

The market had expected asset purchases to be tapered because: 1, Ben Bernanke had dropped fairly big hints at his June press conference that tapering was likely to take place sooner rather than later and 2, because the unemployment rate has consistently declined all year and if it continues moving in this direction then it could hit the Fed’s 6.5% target rate in the coming months.

In the aftermath of the September Fed decision the markets, analysts and Fed commentators were lambasted for being too hasty and for trying to second guess the Fed. While I agree that the markets can get too hung up on the movements of the US central bank, I think that the criticism is unfair this time.

Ben Bernanke did not play fair last week, and mid-press conference shifted the tapering goal posts. He said that the unemployment rate was not a true reflection of the state of the economy (the markets said that at the time the Bank started linking asset purchases to an economic threshold), and instead said that the Fed would focus on broader measures of economic growth. This was backed up by the chairman of the Federal Reserve Bank of New York, who suggested that GDP would also play a part in informing the bank on the timing of tapering; suggesting that forward momentum in GDP is the new pre-requisite before tapering can begin, leaving the unemployment rate on the back burner.

The Fed is not the only central bank to have done this. The Bank of England have flip-flopped just like their peers the other side of the Atlantic. The BOE also has pledged to keep interest rates low until the unemployment rate declines to 7%, a mere 0.7% from where the rate is now. However, in a recent speech, BOE Governor Mark Carney said that if the unemployment did fall to 7% it would not automatically trigger a rate rise… Confused? So is the market.

from Anatole Kaletsky:

When illogical policy seems to work

It’s cynical, manipulative and hypocritical – and it looks like it is going to work. How often do you hear a sentence like this, to describe a government initiative or economic policy?  Not often enough.

The media and a surprisingly high proportion of business leaders, financiers and economic analysts seem to believe that policies which are dishonest, intellectually inconsistent or obviously self-interested in their motivation are ipso facto doomed to fail or to damage the public interest. But this is manifestly untrue. The effectiveness of public policies and their ultimate desirability is in practice judged not by their motivations, but by their results.

Which brings me to the real subject of this column: the improving outlook for the world economy and why many economists and financiers cannot bring themselves to acknowledge it. Let me begin with a striking example anticipated in this column back in March: the boom in house prices and debt-financed consumption that the British government is pumping up in preparation for the general election in May 2015.

from MacroScope:

India’s central bank battles alone in inflation struggle

INDIA-ECONOMY/RATES What more does India's central bank have to do? Last week data showed March inflation rising to almost 9 percent on an annual basis. More importantly, core inflation is above 7 percent for the first time in 3 years meaning demand-side pressures are rising fast. And that's despite the Reserve Bank of India raising interest rates eight times since last March.

The inflation data comes just after a quarterly HSBC report based on purchasing managers indexes showed that inflation in India seemed impervious to monetary policy tightening.

The truth, is the inflation-fighting central bank has little backup from the government which remains stubbornly in spending mode. Its foot-dragging on reform and foreign investment contributes towards keeping food price inflation high. This year's fiscal deficit target is 4.8 percent of GDP and even this
is seen as optimistic.

Central banks face crisis of confidence

Central banks around the world are facing the worst crisis of confidence since the 1930s, as investors, households and firms question their commitment and ability to deliver price stability.

Whether it is inflation or deflation, outsiders question whether the major central banks will be able to regulate prices in the next few years.

TOO HOT ….
Bank of England Chief Economist Spencer Dale last week lashed out at what he branded “dangerous talk” the Bank had gone soft on inflation and was choosing to ignore price increases persistently above the target.

The Knightian dog ate my recovery

Remember when business and economic leaders droned on about “100-year storms,” 2008′s get-out-of-jail free card for people who missed the housing bubble?

This was the whole idea that there was no way that people could be held accountable for the crisis because the notion of there being a problem with continual double-digit house price growth and sky-high leverage was just so darned unlikely.

Well, it looks like we have the 2010 version of how the dog ate their homework again and this time it is called “Knightian uncertainty.”

from MacroScope:

Central banks should hedge: Gary Smith

Gary Smith, head of central banks, supranational institutions and sovereign wealth funds at BNP Paribas Investment Partners, has written a special guest blog for Macroscope in which he argues that central banks should consider ways to hedge their FX reserves against the crisis.

"After the 2008 crisis, a mathematical approach to measure the adequate level of foreign exchange reserves – import cover or an equation relating to short-term debt – no longer has much credibility. In the absence of sensible guidelines on adequacy of reserves there is now a general desire to have plenty of reserves.

yuan.jpg

What is lacking from the reserves debate, however, is whether National Wealth Managers in general (and central bank reserves managers in particular) should invest in assets that might increase in value during a crisis.

A rising tide of capital controls

jamessaft1.jpg(James Saft is a Reuters columnist. The opinions expressed are his own)

Easy money in the United States, a falling dollar and growing flows of funds seeking better returns in emerging markets are touching off a new round of capital controls in hot emerging markets, a trend that could accelerate and will at the very least increase market volatility.

It shouldn’t be a surprise, really; loose money in the developed world is helping to spur investment into emerging markets, driving currencies up and making local exports less competitive for countries which, unlike China, aren’t hitching a free ride as the dollar declines.

Inflation may be a threat for many of these, but with the global economy still struggling, it certainly won’t feel that way to policy makers.

A rally that is both rational and crazy

(Jjamessaft1ames Saft is a Reuters columnist. The opinions expressed are his own)

Stocks and other risky assets are rallying around the world this week because the Group of 20 nations said on the weekend they would keep the economic stimulus flowing, a state of events which illustrates where we are and what a very strange place it is.

The G20, the only group of big hitters that matters because it is the only group which includes the Chinese, met in Scotland over the weekend and, as is the way of these things, did very little with immediate consequences for anybody.

In the communique they issued, the Group of 20 finance ministers, after congratulating themselves on the recovery, more or less admitted that the measures we once thought of as heroic are in the process of becoming commonplace.

from The Great Debate UK:

Is a bubble burbling in financial markets?

JaneFoley.JPG-Jane Foley is research director at Forex.com. The opinions expressed are her own.-

The discrediting of the efficient markets theory in the aftermath of the financial crisis appears to have been accompanied with growing support for the view that rather than efficient in nature, financial markets are predisposed towards the formation of bubbles.

A bubble can simply be defined as an occurrence that begins when the price of an asset has been driven significantly above it "fair" value. According to the efficient markets theory this would not happen.

Position fatigue prompting short-term dollar rethink

– Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own –

Dollar bears have been disappointed by the G20.

Talk of re-balancing remained just talk; the bears can discern nothing substantial. Some risk is being taken off and dollars bought back selectively. While the dollar’s general downtrend is intact, there are risks of a temporary reversal, with some seeing the euro temporarily back to $1.4500/50.

Traders can contrast G20 with the Plaza Accord in 1985 which was driven by U.S. Treasury Secretary James Baker’s persistence. But he only had to convince four peers. G20 is and will be a different story. Dealing with the G20 must be like herding cats.

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