Archive for September, 2014

It’s Only Money

Friday, September 26th, 2014

“Money often costs too much.”                                                                               Ralph Waldo Emerson

It really does all come down to money.

Money decides the outcome of wars and elections.  It ensures that we are properly fed and clothed.  It buys us an education and pays for all of our material needs.  And it may not be able to buy happiness, but it does have a dramatic impact on that vague thing that’s often referred to as “quality of life.”

All of us, if we’re being honest, would rather have more of it than less of it.

But the value of money is variable.  The currency of one country continuously fluctuates in value relative to the currency of every other country – and those fluctuations can have a dramatic economic impact.

A Stronger Dollar

You’d think countries would be striving to make their currencies stronger, but in recent years, we’ve had “currency wars” as competing countries have tried to weaken their currencies to increase demand for their imported goods.

DollarThe United States has criticized China for its currency manipulation, but in the meantime, the Federal Reserve Board’s easy money policies have deliberately weakened the dollar.

Now, though, as other countries’ currencies have become weaker, the dollar has strengthened.  In fact, the dollar reached a four-year high this week against a basket of major currencies, as The Wall Street Journal reported, “amid mounting expectations the Federal Reserve will raise interest rates next year while its counterparts in Europe and Japan consider further measures to raise inflation and spur growth.”

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Janet Yellen Takes Us Through the Looking Glass

Thursday, September 18th, 2014

“When I use a word, it means just what I choose it to mean — neither more nor less.”  

               Lewis Carroll, Through the Looking Glass

The word for today is “considerable,” as in interest rates will remain low for “a considerable time.”

How long is “a considerable time?”

Long enough, apparently, for investors, who boosted the stock market to yet another new record this week, after Federal Reserve Board Chair Janet Yellen announced that the Fed would keep interest rates near historic lows for “a considerable time.”  The Dow Jones Industrial Average crossed 17,200 for the first time ever, closing at a new high of 17,157.

Apparently, investors are like kittens, because, as Alice notes, “whatever you say to them, they always purr.”

Looking-glass-lewis-carrollCNN Money interprets, with certainty, that “considerable” means summer 2015 “at the earliest.”  Yet The Wall Street Journal, referring to the policy statement, admitted, “we have no idea what it says about the future of monetary policy.  We doubt even Fed Chair Janet Yellen knows.”

“Better say nothing at all. Language is worth a thousand pounds a word!”

Lewis Carroll, Through the Looking Glass                                        

Having read the policy statement, we conclude that it means whatever you want it to mean, as it contains more hedges than the Palace of Versailles.  Consider this single sentence …

“The Committee continues to anticipate (hedge 1), based on its assessment of these factors (hedge 2), that it likely will be appropriate (hedge 3) to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal (hedge 4), and provided that (hedge 5) longer-term inflation expectations remain well anchored.”

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A Not-So-United Kingdom

Friday, September 12th, 2014

                                   “Separation is forever.”                               Alistair Darling, former Chancellor of the Exchequer

Any time you divide one number by another number, you end up with a smaller number.

And so it is with Scotland’s vote to succeed from the not-so-United Kingdom, which is scheduled to take place on Sept. 18.

The vote appears too close to call, but even the fact that it’s taking place is disconcerting.  As Rupert Murdoch tweeted, “Scottish poll reflects world-wide disillusion with political leaders and old establishments, leaving openings for libertarians and far left.”

Well, at least the less-Great Britain will still have Wales.  For now, anyway.scotland_colour_map

Why should we care about what’s happening across the Atlantic?  Asking what tiny Scotland has to do with the fate of the U.S. is like asking what tiny Greece has to do with the fate of Europe.

Putting aside the economic impact, this is a time when the world’s democracies need to be united against a growing terrorist threat.  Even President Obama acknowledged this week that ignoring the world’s problems won’t make them go away, when he declared war on the Islamic State.  (OK, he didn’t call it a war, he called it a “counter-terrorism campaign.”  And his predecessors called fighting in Vietnam a “conflict.”)

So, at a time when America is seeking to rally its allies in battle against the Islamic State, one of America’s strongest allies is distracted by an internal split.  Consider what The Spectator had to say about the upcoming vote:

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Now Bad News Is Bad News

Friday, September 12th, 2014

With the end of quantitative easing due to take place next month, reality may once again have an impact on financial markets.

Since QE began more than five years ago, markets have soared on bad news and dropped on good news.  That’s because investors believed that bad news would prolong QE and good news would make it unnecessary.

And there’s been enough bad news over the past five years for the stock market to repeatedly surge to new record levels.20140911_claims

With QE ending in the U.S., but probably soon beginning in Europe, the Federal Reserve Board needs a different tool to manipulate the markets.  While Chairman Janet Yellen and others have been talking about “macroprudential supervision” as the next step, that line is selling like old fish, because no one has explained what Ms. Yellen means by “macroprudential supervision.”

The good news is that good news should finally be good news.  Fundamental performance and economic recovery should mean something again.

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Less than “Less than Zero”

Friday, September 5th, 2014

In June, the ECB lowered the interest rate on bank deposits, including reserve holdings in excess of the minimum reserve requirements, from zero to -0.10%.  This week, surprising just about everyone not named Mario Draghi, the ECB lowered the rate by another 10 basis points to -0.20%.

14950766600_d52f0bba78_zAs we wrote when the less-than-zero rate was announced, “banks will pay a fee on money they fail to lend out.  Whether or not that stimulates the economy, it could encourage banks to take more risk, approving loans that otherwise may not have been approved.  Isn’t that what caused the financial crisis?”

Zerohedge explained that while rates were already negative, “Now they’re even more negative. Because in the world of Central Banking if something doesn’t work at first the best thing to do is do more of it. Whatever you do, DO NOT question your thinking or your economic models at all.”

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