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FT still can only hint at market rigging by central banks
11:49p ET Wednesday, August 27, 2014
Dear Friend of GATA and Gold:
In the conclusion of a series of articles about "asset bubbles," today's Financial Times shows that it is fully aware of market manipulation by central banks but still can't bring itself to put those words together in the same sentence, nor to mention gold in that context.
From today's article, written by the FT's Ralph Atkins:
"Investors have seen central bankers suppressing market volatility; the VIX index of expected U.S. share price movements, known as the 'Wall Street fear gauge,' is at a seven-year low. ...
"With their massively expanded balance sheets, central banks have come to dominate many markets, replacing the private sector. ..."
Too bad that the series ends short of any specification of the most sensitive market central banks are dominating. But mainstream financial journalism in the West can go only so far. Apparently mere hints are supposed to be considered heroic.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
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Central Bankers Face 'Confidence Bubble'
By Ralph Atkins
Financial Times, London
Wednesday, August 27, 2014
http://www.ft.com/intl/cms/s/0/dbd40702-29dc-11e4-914f-00144feabdc0.html
Frothy financial markets, asset prices at perilous highs, cautious investors pushed to take ever bigger risks -- the side effects of central bank actions since the collapse of Lehman Brothers investment bank in late 2008 have been considerable. Little wonder there has been enough talk of asset "bubbles" for a Financial Times series.
Central banks, which saved the global economy from catastrophe, now face different challenges. They have to return advanced economies to stable and sustainable growth paths. But can they do that without fresh financial market disruption? What if economies instead splutter and bubbles burst? What if there is a "bubble" in confidence in central bankers?
... Dispatch continues below ...
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"Financial markets have been consistently rewarded for believing central banks are their best friends. At some point those rewards have to be validated by fundamentals," warns Mohamed El-Erian, chief economic adviser to Allianz.
Over the past six years, betting on the "central bank put" -- a belief that central banks would ride to financial markets' rescue -- was hugely profitable. The FTSE All world index is up 150 per cent since March 2009; the US S&P 500 is up 200 per cent.
Ben Bernanke, former US Fed chairman, drew on his expertise of depression era economics. In Europe, Mario Draghi, European Central Bank president, prevented a eurozone break-up by pledging "whatever it takes" to preserve its integrity. Haruhiko Kuroda, the Bank of Japan's governor, is now trying to drag his country out of decades of deflation.
Investors have seen central bankers suppressing market volatility; the Vix index of expected US share price movements, known as the "Wall Street fear gauge," is at a seven-year low. When there were setbacks in the "normalisation" process, central banks have acted; the Fed learnt from last year's "taper tantrum", the upset created globally when it first hinted at plans to scale-back quantitative easing, or asset purchases.
In the process, the nature of central banking has changed. "Central bankers feel pretty chuffed about their performance during the crisis years, and have every right to be," says David Kelly, chief global strategist at JPMorgan Asset Management. "They all come from the school of thought that monetary policy has limits, but they seem to have forgotten what they learnt. The whole consensus about a conservative approach has gone out of the window."
It is not a position with which central bankers necessarily feel comfortable. They have pushed for politicians to implement structural reforms -- often unsuccessfully -- and are aware that they have only a few tools, essentially their control over interest rates and regulatory powers. "I would not like to be a central banker at the moment because most finance ministers have said to them 'you're our last chance, don't muck it up,'" says John Nugee, a former Bank of England official who now advises central banks.
Mr El-Erian adds: "We have never been here before in terms of the amount of responsibility they have taken with such imperfect policy instruments."
Navigating the world's biggest economies into safe waters will require technical skills and smart judgment. With their massively expanded balance sheets, central banks have come to dominate many markets, replacing the private sector. A worry is that markets have become dependent on central banks. Mr Nugee says: "Central banks are the plaster cast around the market; they support it because it cannot support itself. If we take the cast away, we don't know if the market will have healed sufficiently."
Central banks have taken on bank supervisory functions and "macroprudential" powers to avert systemic crises. The extra responsibilities have increased their leverage -- but also the dangers of policy objectives clashing and of central banks losing crucial credibility when things go wrong.
Meanwhile, scrupulous judgment will be required in timing the first moves towards tightening monetary policies; the Bank of England is widely expected to be the first to raise interest rates.
A big worry is that the global efforts of central banks have still to create sufficient economic growth -- and equity markets have gone too far in pricing in a recovery. "Either the market has to correct, to converge toward a fundamental situation that remains challenging, or the macroeconomic situation has to improve," warns Gilles Moëc, senior economist at Deutsche Bank.
The other school of thought is that it is the central banks that will fall behind the curve. Some fear the Fed has underestimated improvements in US labour markets and inflation dangers. "There is a level of complacency within global fixed income markets about the ability of central banks to keep long term interest rates low," says Mr Kelly. "If they act cautiously, they are going to overcook the economy -- and eventually have to raise interest rates faster than they expect."
Betting central bankers will get it right is not for the fainthearted.
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