Mint – Blain’s Morning Porridge
Something’s happening and it’s happening right now, you’re too blind to see…
I shall now consider the tau of the Stranglers to work out what we’re missing..
The consensus is the Bank of Japan did little. That’s a mistaken conclusion. I’d argue their plans to engineer the yield curve could well unleash a further set of unintended consequence timebombs on markets. There is a note from Citibank saying it represents the end of the quantitative easing era as the BoJ switches from balance sheet expansion to managing the curve. I disagree...this is a deep dive into even murkier aspects of desperate monetary policy.
There are three responses to dealing with stuff that doesn’t work: a) my default setting it to hit it hard and repeatedly to “persuade” it to work; b) the BoJ kept doing the same thing in hope it might finally work; and c) tinkering with the thing in the hope it might work.
The BoJ is now on option (c). I think their “asset price targeting” sounds a bit “Big Brother” to me...and I can’t wait to see how they might manage prices in times of crisis. But, it looks like they are still aiming for the same old objectives (whatever they were) by a different route. The fact the BoJ has bought just about everything it can (to little discernible effect) begs a credibility question. As the Irish say, “if you’re trying to get there, I wouldn’t start from here.”
Meanwhile, the Federal Reserve pulled the plug on hopes and expectations of normalisation last night. Great news for stocks...blah...new normal flat yield curve, and sell the dollar. Although they tell us activity is picking up, jobs are gaining solidly, and there might be a hike in December – that was not a bunch of central bankers who have a brave and courageous plan to rekindle entrepreneurial animal spirits and get the economy moving again by ending the inflation of financial assets, and focusing on growth. Actually, that will also require massive tax-reform, but more on that later.
Nope that was a bunch of superannuated policy economists taking their time to figure out what’s happening and doing nothing. Or it might have been fear of doing something political ahead of the election, or maybe they just don’t know. What it wasn’t was decision making. “We don’t know, so wait and see” is what it was.
Monetary policy and the experimentation of the last few years have proved it’s not a science, but an arcane art form. I suspect in 100 years folk will look at it with the same sense of bewildered amusement as we consider phrenology maps of the skull.
Meanwhile, back on the real world, the new issue market continues to fascinate me. The rules are quite simple. Bring a deal at a sensible well considered price offering investors a little upside and it sells well, is oversubscribed and jumps in the secondary market. Bring a deal at a tight price and it gets ignored and dives in the secondary.
It doesn’t take a financial genius to figure out that’s the action of an unconvinced market – cherrypicking deals because they look cheap, rather than offer fundamental value.
Personally I really really can’t see the value in scrabbling over a basis point or two on a corporate bond yielding the square root of less than nothing when asset-backed deals with a 7 percent coupon and upside potential exist. Alternatives, Alternatives.
The ways of financial markets are strange and curious things.
No Porridge tomorrow as I’m off sailing with clients…
Head of Capital Markets/Alternative Assets