'Central banks ensured that enormous amounts of “money” simultaneously flowed across various – now highly correlated - asset classes. “Funny” how things work. Just when it was becoming apparent that monetary stimulus was losing its punch, desperate policy measures spurred one final destabilizing “whatever it will take” speculative whirlwind. This has created an extraordinary backdrop of markets set up for disappointment and dislocation.'<blockquote>'September 11 – Reuters (Silvio Cascione): “Brazilian prosecutors launched a preliminary investigation into an alleged corruption scheme at the national development bank BNDES, weekly magazine Veja reported… The prosecutors have been gathering documents for at least two months and are in talks with a former BNDES executive about a potential collaboration… BNDES is the largest source of long-term corporate credit in Brazil and is one of the world's largest development banks. The bank ramped up lending under the administrations of the Workers' Party between 2003 and 2015 as part of government efforts to boost economic growth, offering subsidized credit to several of Brazil's largest firms across sectors.”
It was another interesting week in the currencies. The dollar caught a bid, especially versus EM and Europe. And as the marketplace turns its focus back to risk and liquidity, it’s notable that the British pound was hit 2.0% against the dollar this week. The Japanese yen gained 0.4% versus the dollar.
The much anticipated Fed and BOJ meetings are now just days away (Sept. 20/21). Market odds for the FOMC raising rates next week have dropped down to about 10%. Significantly more uncertainty surrounds the Bank of Japan’s meeting.
September 15 – Wall Street Journal (Takashi Nakamichi): “The world’s leading experiment in monetary easing is floundering, and its engineers are divided over how to get it on track. The Bank of Japan has tried radical measures for 3½ years to reflate the country’s sagging economy, resorting this year to negative interest rates. Growth and inflation remain elusive. Now the bank’s board, while still in favor of easing, has some members wanting to revise the methods for doing so—likely sparking uncertainty for economy-watchers and worries for investors. Japan’s financial regulator, big banks, insurers and advisers to Prime Minister Shinzo Abe have all piled into the fray with policy prescriptions, in a ferment that comes less than a week before the BOJ meets to decide its next move. ‘The BOJ’s policy has become a ‘cloudy cocktail’—nontransparent and difficult to understand,’ said Nobuyuki Nakahara, a former BOJ board member who advises Mr. Abe… The suspicion that central-bank firepower is reaching its limits finds support in Japan, where the BOJ has yet to generate steady inflation despite buying nearly $800 billion of bonds annually since late 2014, plus billions of dollars worth of exchange-traded funds.”
..
Central banks ensured that enormous amounts of “money” simultaneously flowed across various – now highly correlated - asset classes. “Funny” how things work. Just when it was becoming apparent that monetary stimulus was losing its punch, desperate policy measures spurred one final destabilizing “whatever it will take” speculative whirlwind. This has created an extraordinary backdrop of markets set up for disappointment and dislocation.
My view holds that Global Risk Off has likely commenced. It’s reemerging in Europe, in EM, in energy and in global financials. China remains a major unknown. The economy stumbles along on record Credit expansion, Credit that turns more problematic by the month. A mortgage lending Bubble is increasingly dominating Credit growth, creating serious issues for regulators, the financial sector and the overall maladjusted Chinese economy. And Global Risk Off risks triggering another bout of destabilizing outflows and China currency angst, which would be an even bigger problem for the world today than it was at the beginning of the year.'
- Doug Noland,
Risk Off, the BOJ and China, September 17, 2016</blockquote>
Context<blockquote>
Weimar malaise - '..Monetary policymakers are urging more extreme actions in their frantic pursuit of higher inflation. They should be careful what they wish for.''..the Federal Reserve has completely failed to recognize .. a flawed monetary policy framework..''..I’ve lost all respect for monetary economists..'</blockquote>