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Futures Soar On Hope Central Planners Are Back In Control, China Rollercoaster Ends In The Red
Futures Soar On Hope Central Planners Are Back In Control, China Rollercoaster Ends In The Red
For the first half an hour after China opened, things looked bleak: after opening down 5%, the Shanghai Composite staged a quick relief rally, then tumbled again. And then, just around 10pm Eastern, we saw acoordinated central bank intervention stepping in to give the flailing PBOC a helping hand, driven by the BOJ but also involving NY Fed members, that sent the USDJPY soaring which in turn dragged ES and most risk assets up with it. And while Shanghai did end up closing down -1.7%, with Shenzhen 2.2% lower at the close, the final outcome was far better than what could have been, with the result being that S&P futures have gone back to doing their thing, and have wiped out all of yesterday’s losses in the levitating, zero volume, overnight session which has long become a favorite setting for central banks buying E-Minis.
As Bloomberg’s Richard Breslow comments, the majority of Asian equity indexes finished with losses but on an upbeat note, helping most European markets to start with modest gains that have increased with the morning, thanks to the aforementioned domestic and global mood stabilization. S&P futures have been positive all day other than a brief dip negative at the worst of the day’s China levels. Chinese equities opened quite weak and were down another 5% before the authorities assured the market that speculation they would withdraw from market supportive measures was misguided. This began a rally of over 6% before a mid-afternoon swoon.
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When Authorities “Own” the Market, The System Breaks Down: Here’s Why
When Authorities “Own” the Market, The System Breaks Down: Here’s Why
Central planning asset purchases aimed at propping up prices destroy the essential price discovery needed by private investors.
Panicked by the possibility of declines that undermine the official narrative that all is well, authorities the world over are purchasing assets like stocks, bonds and mortgages directly. Central banks are explicitly taking on the role of buyers of last resort on the theory that if they place a bid under the market to arrest any decline, private buyers will re-enter the market once they detect that the risk of a drop has dissipated.
The idea is that once private buyers flood back into the market, central banks can unload the assets they bought to stem the panic. In this view, the market is not based on fundamentals such as revenues, profits and price-earnings ratios–it’s all about confidence. If central banks restore confidence by reversing any drop with massive buying, this central-planning manipulation will restore the confidence of private investors.
When this restoration of confidence has been accomplished, private buyers will happily buy the central banks’ stocks, bonds and mortgages. The central banks’ portfolios of assets will shrink and the central banks will once again have “dry powder” to buy assets the next time markets falter.
This sounds reasonable in the abstract, but it doesn’t work in the New Normal economy central banks have created. Let’s consider a simple example to see why.
Let’s start by recalling that prices are set on the margin, i.e. the last view shares, bonds or homes bought/sold. In a neighborhood of 100 houses, the price of each home is based on the last few sales which become the comparablesappraisers use to establish the fair market value of all the nearby properties.
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The Government and the Currency
The Government and the Currency
[Human Action (1949)] Reprinted from Mises.org
Media of exchange and money are market phenomena. What makes a thing a medium of exchange or money is the conduct of parties to market transactions. An occasion for dealing with monetary problems appears to the authorities in the same way in which they concern themselves with all other objects exchanged, namely, when they are called upon to decide whether or not the failure of one of the parties to an act of exchange to comply with his contractual obligations justifies compulsion on the part of the government apparatus of violent oppression. If both parties discharge their mutual obligations instantly and synchronously, as a rule no conflicts arise which would induce one of the parties to apply to the judiciary. But if one or both parties’ obligations are temporally deferred, it may happen that the courts are called to decide how the terms of the contract are to be complied with. If payment of a sum of money is involved, this implies the task of determining what meaning is to be attached to the monetary terms used in the contract.
Thus it devolves upon the laws of the country and upon the courts to define what the parties to the contract had in mind when speaking of a sum of money and to establish how the obligation to pay such a sum is to be settled in accordance with the terms agreed upon. They have to determine what is and what is not legal tender. In attending to this task the laws and the courts do not create money. A thing becomes money only by virtue of the fact that those exchanging commodities and services commonly use it as a medium of exchange.
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What We Learned over Dinner from a Swiss Central Banker
What We Learned over Dinner from a Swiss Central Banker
Dear Diary,
Today… what we learned over dinner from a surprisingly smart central banker.
But first, to the markets…
The Dow shot up 121 Dow points yesterday, recovering most of Tuesday’s slide.
In a series of business meetings Tuesday and Wednesday, we explained why nobody but us is rooting for a depression.
Yes, there’s no point in hiding it. We would like to see a depression. Short, swift, and decisive – a quick and sharp end to the biggest credit expansion in all of history.
As secretary of the Treasury Andrew Mellon said after the 1929 stock market crash:
Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.
Credit Cannot Increase Forever
“It’s unbelievable,” said colleague Merryn Somerset Webb. Merryn is the editor ofMoneyWeek magazine in London.
“London property prices just keep going up and up. It’s so expensive our writers can’t afford to live here anymore. I’m thinking of moving the business to Edinburgh.”
You can’t build a solid economy on the jelly of unaffordable housing, unpayable debts, and unsustainable asset prices. But that’s what we’ve got.
The only way to get down to something more reliable… more real… and healthier… is to wash away the financial glop and goo that has accumulated during the last 30 years.
…click on the above link to read the rest of the article…
Market Tops In! Why Buy-The-Dippers Can’t Get It Up
Market Tops In! Why Buy-The-Dippers Can’t Get It Up
I am sure some chart reader can explain the S&P 500’s laborious struggle since September 2——the day it crossed the 2000 barrier—-as a classic “wall of worry”. But that event occurred nearly seven months ago and the market has dipped 15 times since then and has actually plunged six times (by more than 3%). And all it had to show for its exertions going into today’s opening was a 50 point or 2.5% gain. In this bull market, that’s a rounding error.
So we have arrived at a precarious place. After the Fed has spent six-years inflating a new and even more stupendous financial bubble—-the third this century—-the market top is in. And after five-and-one-half years of so-called recovery from the recession’s end in June 2009, the bottom is now falling out of the economy—-both abroad and here, too.
In that context, a new form of danger arises. The Keynesian pettifoggers at the Fed have painted themselves into an epochal corner. After 78 months of ZIRP they have no idea about how and why they got here; and now, mired deep in the lunacy of free money, they are clueless about where they are going next.
But here’s the thing. During its long descent into ZIRP, consensus at the Fed came from the Easy Button. Once they got to the zero bound in December 2008, it was always possible to find one more reason for delaying the day of interest rate normalization and to persuade any reluctant members of the FOMC that the economy had not quite emerged from its slump, even if “escape velocity” into full employment was just around the corner.
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Failed Discipline, Failed Reforms and Grexit: Why the Euro Failed
Failed Discipline, Failed Reforms and Grexit: Why the Euro Failed
There is no substitute for the discipline of a market that cannot be manipulated by political elites.
It’s not that difficult to understand why the euro is doomed to fail. Given its structure, there is no other possible outcome but failure. Greece’s exit (Grexit) will simply be the first manifestation of the inevitable structural failure of the euro.
To understand why this is so, we have to start with two forms of discipline: the market and the state.The market disciplines its participants by discovering the price of not just goods and services but of currencies and the potential risks generated by fiscal and trade imbalances.
When nations issue their own sovereign currencies, the global foreign exchange (FX) market enforces an iron discipline on all participants. If a nation prints excessive quantities of its currency without boosting its production of goods and services by an equivalent amount, the FX market punishes this nation by devaluing its currency.
The market provides unwelcome feedback to the imbalances of interest rates, credit and currency: imports become prohibitive, nobody wants to buy the nation’s bonds unless the interest rate compensates for the higher risk, and so on.
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Moneyness: Robin Hood central banking
Moneyness: Robin Hood central banking.
There were plenty of reports in the press this year accusing central banks of behaving like King John, stealing from the poor to help the rich. Rich people’s wealth tends to be geared towards holdings of stocks and bonds whereas the poor are more dependent on job income. By pushing up the prices of financial assets, central bank quantitative easing helped rich people while leaving the poor in the dust.
There are a lot of problems with the King John critique of quantitative easing.
First, a good argument can be made that QE had almost no effect on prices. Insofar as purchases wereconsidered temporary by market participants, then the newly created money would not have been spent on stocks and whatnot, its recipients preferring to keep these balances on hand in order to repay the central bank come the moment of QE-reversal. If so, the large rise in equity prices since 2009 is due entirely to changes in the fundamentals and animal spirits, not QE.
But let’s say that QE was not irrelevant and can be held responsible for a large chunk of the rise in equity prices over the last few years. Even then, the real economy, and therefore the poor, would have been equal beneficiaries of QE. As I pointed out in my previous post, financial markets are not black holes. Newly-created money, insofar as there is an excess supply of the stuff, cannot stay ‘stuck’ in financial markets forever. For every buyer of a financial asset there is a seller, and that seller (or the next seller after) will choose to do something ‘real’ with the proceeds, like buying a consumption good, investing in real capital, or hiring an employee—the sorts of purchases that benefit the poor. So if QE succeeded in pushing up financial markets (thus helping the rich), then the real economy (and the poor) must have benefited just as much. The King John argument doesn’t hold much water.
But wait a minute. If both financial markets and the real economy were equally inflated by QE, then why have wage increases been so tepid relative to equity prices? One explanation is that wages are sticky whereas financial prices are quick to adjust. The relative wealth of the poor, comprised primarily of the discounted flows of wage income, stagnates, at least until wages start to catch up at which point it is the turn of the the relative wealth of the rich to decline.
