The more ‘embarrassment’, the better…

  • The manipulators
  • Better than gold?

It’s a great day for Australia. As the Sydney Morning Herald reports:

The Turnbull government has suffered more embarrassing scenes in Parliament, with senators forced to give rambling monologues about their colleagues and favourite television shows because the government had no bills ready for debate.

The Herald describes the situation as ‘embarrassing’. We consider it enlightening. If only every day in Parliament House was like that.

If it were, folks may begin to wonder why they need to elect politicians at all.

After all, despite the lack of things to debate, has Australia’s economy ground to a halt? Has the general public stopped working, wondering what to do next because the government hasn’t told them exactly what to do?

No. Things just go on.

As always, the folks who criticise so-called ‘do nothing’ governments should be grateful if a government fails to do something.

We’ve always wondered just how it can be possible for any sane person to think of new laws, anyway. Surely the world has reached ‘peak law’, and it’s about time governments went about repealing laws, rather than inventing new ones.

Markets

Over the weekend, the Dow Jones Industrial Average fell 394.46 points, or 2.13%.

The S&P 500 fell 53.49 points, or 2.45%.

In Europe, the Euro Stoxx 50 index dropped 30.34 points, for a 0.98% fall. Meanwhile, the FTSE 100 fell 1.19%, and Germany’s DAX index lost 0.95%.

In Asian markets, Japan’s Nikkei 225 index is down 271.11 points, or 1.6%. China’s CSI 300 index is down 2.11%.

In Australia, the S&P/ASX 200 is down 121.18 points, or 2.27%.

On the commodities markets, West Texas Intermediate crude oil is US$45.13 per barrel. Brent crude is US$47.29 per barrel.

Gold is US$1,328 (AU$1,762) per troy ounce. Silver is US$18.93 (AU$25.13) per troy ounce.

The Aussie dollar is worth 75.35 US cents.

The manipulators

Over the past few years, you may have read stories about how banks have manipulated interest rates.

Take this from the Australian Financial Review in March this year:

How one bank, however big, might manipulate the Australian money market’s main benchmark interest rate has been the subject of much conjecture.

Court documents filed on Friday by the Australian Securities and Investments Commission have offered an insight into how traders from various parts of the ANZ Banking Group shared information and facilitated the supply and demand of bank bills.

This allowed them to conjure up a favourable interest rate setting that allowed the bank to make millions of dollars of profit in a five minute window, it is alleged.

This, also from the AFR:

Traders at Westpac openly discussed how “f—— with the rate set” could hurt some customers and ultimately and “deservedly” harm the bank’s reputation if an inquiry into the bank bill market was ever conducted.

The revelations are presented in new court documents that provide fresh detail on alleged manipulation by the bank of a key benchmark interest rate, the bank bill swap rate (BBSW).

Or this from Business Insider:

The corporate regulator has launched legal action against National Australia Bank for allegedly manipulating the bank bill swap rate (BBSW) 50 times. The BBSW is a key benchmark interest rate that determines the pricing of financial products across the economy.

Internationally, there’s this from Reuters in May this year:

Citigroup Inc has agreed to pay $425 million to resolve civil charges that it tried to manipulate interest rate benchmarks.

In announcing the settlement on Wednesday, the Commodities Futures Trading Commission said Citigroup affiliates also made false reports in connection with ISDAFIX benchmark rates and dollar Libor rates during the financial crisis to protect its reputation.

You generally won’t find us sticking up for the banks. And we’re not about to do so here.

But in our naïve world, we have long wondered what makes manipulation of interest rates by retail and merchant banks any different to the manipulation of interest rates by a central bank.

If you know the answer, send that answer on the back of a postcard to letters@portphillipinsider.com.au.

We say that in the context of various comments over the past few weeks, months and years — which your editor finds hard to view as anything other than interest rate manipulation.

Take this from the Wall Street Journal late last week:

Federal Reserve Bank of Boston President Eric Rosengren said Friday that a “reasonable case can be made” for tightening interest rates to avoid overheating the economy.

Holding rates at their current low level for much longer risks making labor markets too tight, forcing the Fed to raise interest rates sharply, which could result in another recession, he warned in remarks prepared for a morning speech in Quincy, Mass.

The impact of these comments on the market? The one-month chart below gives you some idea of the impact of his words on the US 30-year bond yield:



chart image

Source: Bloomberg
Click to enlarge


The move isn’t all due to Mr Rosengren. But it’s more than a coincidence.

Going back further, in August, the Irish Times noted:

Most Asian share markets tumbled on Monday while the US dollar added to gains made after Federal Reserve chair Janet Yellen indicated a US interest rate increase remains on the cards for this year.

The case for a US rate hike has strengthened in recent months, with a lot of new jobs being created, and economic growth looks likely to continue at a moderate pace, Yellen said in a speech at the Fed’s annual monetary policy conference in Jackson Hole, Wyoming, on Friday.

Two months before that, the Daily Mail reported:

A rate hike in July is still a possibility, Federal Reserve Chair Janet Yellen said.

Speaking at post-meeting news conference, Yellen refused to rule out the option of hiking a key short-term interest rate at the Fed’s next meeting on July 26 and 27.

A month previously, CNBC noted:

Federal Reserve Chair Janet Yellen said Friday an interest rate hike is “probably” appropriate in the coming months if economic data improve.

“It’s appropriate, and I’ve said this in the past, I think for the Fed to gradually and cautiously increase our overnight interest rate over time and probably in the coming months, such a move would be appropriate,” she said in response to a question at Harvard’s Radcliffe Institute for Advanced Study.

And just a few days after that comment from Dr Yellen, CBC in Canada reported:

An ally of Federal Reserve chair Janet Yellen who has been a longtime skeptic of raising interest rates signalled Friday that the Fed should be in no hurry to act, especially after a bleak U.S. jobs report was released earlier in the day.

It’s hard for us to see how these comments can be anything other than attempts to manipulate the market.

We would argue that they are manipulation, and, what’s more, that the Federal Reserve and markets are fully aware of this.

In fact, the concept of ‘forward guidance’ under former Fed chairman Dr Ben S Bernanke was entirely geared towards pushing market expectations in a certain way.

Of course, the policy turned out to be a failure, as markets stopped believing that interest rates would ever rise after targets and timeframes for rising rates often came and went without anything changing.

Now, folks could argue against our point on manipulation in a couple of ways. For one, they could rightly point out that the US Federal Reserve system isn’t technically a single central bank.

Instead, the Federal Reserve system comprises 12 regional Federal Reserve banks. Each of those regional Federal Reserve banks have different private shareholders and different interests.

The Federal Reserve Bank of Richmond in Virginia oversees a different economy to the Federal Reserve Bank of San Francisco. The Federal Reserve Bank of Boston oversees a different economy to the Federal Reserve Bank of Minneapolis.

And so on.

But ultimately, we would argue that the ‘decentralised central bank’ nature of the Fed is only a façade. The real power of the Fed lies with the Fed chairman and the Federal Reserve Bank of New York (the only one of the 12 regional banks to have a permanent seat on the interest-rate setting committee).

Whatever the regional Federal Reserve presidents say to their ‘constituency’, the final decision on interest rates will come down to what’s in the best interests of the Federal Reserve system as a whole — and that means doing whatever the government wants it to do.

The other argument that folks may have with our characterisation of the Fed as ‘manipulators’ is that the Fed’s decisions are in the national interest, whereas alleged manipulation by retail and merchant banks is with a profit motive in mind.

That could be a fair point, if it wasn’t for the fact that the Fed has a profit motive, too. As the Los Angeles Times reported earlier this year:

The Federal Reserve said Monday it sent a record $97.7 billion in profits to the U.S. Treasury as the central bank’s vast holdings of mortgage-backed securities and other investments continued to produce a bumper crop of interest income.

Well, what do you know?

Is there a direct link between the regular and various comments from Fed members and the profits racked up by the Fed?

We’ll leave others, who are much smarter than your editor, to unravel that. But whatever. All we have to say is that, in the interest of fairness, if retail and merchant banks are being called to account for manipulation, the very least the regulators could do is explain why and how the actions of central banks aren’t classified as being manipulative.

Better than gold?

As you may have noticed, the world’s markets took a beating at the end of last week.

It continued today.

The S&P/ASX 200 is down over 2%. Japan’s Nikkei 225 index is down in a big way too.

It’s a big down-day for commodities too. The oil price is down over 1.5%. Copper is down nearly 1%. And even soft commodities like cocoa fell over 3% on Friday.

It is then interesting to note that, among the casualties, gold doesn’t appear to be one of them. As we write, the gold price remains around the US$1,330 level.

In Aussie dollar terms, it’s actually up, due to the lower Aussie dollar.

But of more interest to us is something that’s not gold itself, but which, after a stunning start to the year, has started to ease back.

It’s now heading back to what we like to call the ‘buying zone’. If it gets there, and then begins to reverse, it could result in multiple double or even triple-digit gains.

If you want to buy gold, go right ahead. But if you potentially want bigger returns from gold, without actually owning gold, this is an investment idea I strongly recommend you check out.

More details coming soon. Stay tuned.

Cheers,
Kris