Tuesday, July 28, 2015

"Puzzled" BoC cuts rates, admits "rate cut will increase financial imbalances"

Well it's official: another notch on the interest rate belt (Canada's now really losing rate fast, the austerity diet must be working). The great deflation is definitely now underway.

Before I really dive into some of Poloz's comments today I want to take you back to January of this year where the Bank of Canada first cut rates (a rate cut which I will point out now obviously didn't do anything). Flashback, January, 2015:
The Group of Seven’s biggest crude exporter is already feeling the effects of crude oil dropping below $50 a barrel, as companies such as Calgary-based Suncor Energy Inc. reduce staffing and investment. The central bank said today said the economic recovery will be delayed until the end of next year and the needed rotation from indebted consumers to growth fueled by business spending is less certain.
Suffice to say the needed rotation from indebted consumers to growth fueled by business spending didn't happen and this has the BoC quite "puzzled" but despite being "puzzled" and despite the January rate cut not working they're cutting rates again anyway even though they've stated when they originally cut rates (and again repeated this time) they do not expect to see the rebound until the second half of the year. Hmm - so if everything is still ultimately going to plan why cut rates?

But their outlook gets even better for their expected rebound is based on their predictions of U.S. growth! Like, did nobody catch the fact that they now are not only failing to predict our growth situation, but are trying to predict the U.S. growth situation too? Reporters and listeners swallowed this up without even blinking, that someone that was "puzzled" why their forecasts weren't coming true in regards to their now infamous predictions of a lower dollar somehow boosting exports to the population in the U.S. which is equally indebted was now feeding them lines of predictions of not only this country but another as well and nobody bats an eye.

Frankly, Stephen Poloz, like Mark Carney, is full of shit.

Of course much of the talk of improvement in the U.S. is being driven by the Federal Reserve's constant talk about raising rates even though time after time they delay it in hopes growth takes on some sort of momentum (spoiler: it won't) much as a few years ago Carney was constantly talking about raising rates which as I accurately described back then was a bluff in a hope to sort of terrorize the population not into taking personal loans. News articles blanketed Canadian outlets on "what to do when rates rise", etc, etc. It was all bullshit folks and so is the U.S. talk of raising rates.

To be honest I doubt the Fed will raise rates at all. If the U.S. does raise rates it will simply be so that they can then lower them again for the global recession the world has already entered (or more accurately never escaped), the Fed and the world's central banks are out of tools.
Another way to understand the increasing reliance on central-planning extremes and their declining effectiveness is diminishing returns: more treasure, capital, time, energy and labor must be expended to keep the status quo from falling off a cliff. 
The Fatal Disease of the Status Quo: Diminishing Returns 
All of this extreme malinvestment requires more and more control of the national resources, so liberties must be curtailed and further extremes of centralized power and control must be imposed on the hapless citizenry. The resources of the many are increasingly stripmined to maintain the power and avarice of the few. 
I recently discussed these trends with Greg Hunter of USAwatchdog.com in a 23-minute video program, Policy Extremes Maintain Illusion of Stability
Let's review the policy extremes that are yielding diminishing returns: 
1. Zero interest rate policy (ZIRP): central planners' favorite tool for robbing savers and people who have socked away money for their retirement and handing the cash to banks. Now that central bankers have pegged interest rates at zero for 6+ years, there's nothing left in ZIRP but to push rates into negative territory, i.e. it now costs you money to park your cash in a bank. 
There's not much juice left in the zero-interest rate policy, and negative interest rates smack of central-planning desperation--which feeds the very fear and insecurity that trigger panics and crashes. 
2. Directly buying assets to prop up failing markets. The Chinese central planners are the latest authorities to reach for the last tool at the bottom of the central-planning toolbox:buying stocks and bonds directly to create the illusion of demand for increasingly shaky financial assets. 
There are two problems with creating bogus demand by using central bank money to buy stocks and bonds: one is this communicates desperation (see above), and the vast scale of bubblicious debt and equity markets have turned even trillion-dollar purchases by central planners into handfuls of sand thrown at a rising tide. 
Global equities now total $64 trillion and debt securities (bonds, etc.) total $95 trillion. Global real estate totals $180 trillion. Once the risk-on euphoric trust in central banks' omnipotence fades and risk-off selling begins in earnest, how much would central banks have to buy of this $340 trillion to keep the bubble inflated? 
Is it plausible to believe that central planners buying less than 1% of this will stop a landslide of selling? Would even 2% ($7 trillion) make any difference? 
3. The grab-bag of desperate policy extremes: banning short-selling, bail-ins (the theft of depositors' cash to bail out the bankers), partial closure of stock exchanges, currency devaluations, and so on. You can create a good catalog by just listing every action of Chinese central planners in the past month. 
As noted above, the problem with these policy extremes is that they are so painfully visibly acts of central-planning desperation. If things are as positive as we're told, then why are central planners forced to impose such absurdly extreme policies to keep the status quo from imploding? 
If these policies worked, why are interest rates still pegged to zero after six years of "growth" and the inflation of monumental asset bubbles? 
If these policies don't work (and they obviously don't, otherwise the authorities could have normalized interest rates and ceased quantitative easing, stock purchases, plunge protection schemes, etc. many years ago) and central planners keep doing more of what has failed, then the only possible conclusions are: 
1. The policy extremes will never work 
2. The central planners' continued expansion of policy extremes reveals their desperation 
3. When diminishing returns drop below the zero boundary, the system crashes.
 It's now been a week and a half since I began writing this post as I just didn't feel there was enough content here on it's own but of course when it comes to the Bank of Canada all you need to do is leave for a few days and some other point inevitably will be brought up and this holds true today.
OTTAWA (Reuters) - The Bank of Canada has come under fire for its increased reliance on an inflation gauge that some economists say sows confusion in financial markets and could eventually lead to monetary policy errors. 
The central bank, which angered many forecasters in January with a surprise rate cut and eased again this month, has a mandate to control inflation, measured by the country's consumer price index (CPI). It also uses a core-CPI measure that strips out some volatile items. 
Bank of Canada policymakers have put less onus in recent months on these public measures, pointing to the bank's own calculation of an "underlying trend in inflation." 
They say this measure, which excludes transitory factors like meat shortages and the effect of a weakening Canadian dollar, gives a clearer picture of slack in the economy. 
But some economists say its use effectively shifts the goal posts, making it harder to interpret how Governor Stephen Poloz will react to data and increasing the risk interest rates could stay low for too long. 
"If the economy was in better shape, and for whatever reason they didn't want to raise rates, what's to keep them from understating where they believe underlying inflation is?" asked Bank of Montreal senior economist Benjamin Reitzes. 
The Bank of Canada's is supposed to keep inflation at the midpoint of a 1 percent to 3 percent target range. While annual inflation was at just 1.0 percent in June, core-CPI was 2.3 percent and has run above the 2 percent target since August. 
But the bank estimated underlying inflation was 1.5 percent to 1.7 percent when it cut rates on Wednesday, and said much of the difference with core-CPI is due to currency weakness, which boosts import prices. 
Combined with the bank's decision to drop forward guidance, the use of an unpublished underlying trend means less transparency, said David Tulk, chief Canada macro strategist at TD Securities. 
"It is unorthodox to be using a measure that cannot be calculated by others," Tulk said. "Since they model the currency pass-through and other one-time effects, their underlying measure cannot be easily replicated." 
In response to the criticisms, the Bank of Canada said that while it targets total inflation, underlying inflation helps it understand "noise" from temporary factors. 
"Our use of multiple measures of inflation, which we clearly explain, helps us avoid making monetary policy errors - it doesn't increase the risk of making them," spokeswoman Louise Egan said. 
"This type of analysis is not new for the Bank. Our challenge has always been to look through the temporary effects and aim our policy at the movements in inflation that are persistent." 
CIBC World Markets Chief Economist Avery Shenfeld sees some justification for looking through the depreciation effect, but takes issue with excluding other things like meat and phone costs. 
"That practice could down the road have the Bank of Canada ignoring an inflation trend that wasn't as temporary," he said.

TD's Tulk said the fact core inflation was above 2 percent at the time added to the surprise of the January cut and noted that other central banks tend to focus on public inflation gauges.
 Yes, the "puzzled" Bank of Canada is so amazing at forecasting that they use a super-secret "inflation trend" metric which conveniently despite the fact core-cpi has been running at 2.3% hasn't yet met their 2% inflation target. Of course for the people on the ground that 2.3% (likely understated as the two tier economy of the poor relies heavily on these volatile items) is very real. That's real currency coming out of your monthly budget. Contrast this with the bank's earlier statement: "rate cut will increase financial imbalances" and it seems full well they know what they're doing, doesn't it? The rate cuts are just not in your favour; they're in the favour of the banking and credit oligarchs who need even more liquidity.

You'll remember awhile ago on my post on the meaning of low-inflation in the risk adverse free market we briefly covered the fact that central bank rates are a guideline for private banks and that when banks don't pass on the full savings it is essentially automatic profit.

Mortgage broker says banks aren't giving Canadians the interest savings they deserve
"It's tough to argue that it's anything but [a money grab]," Ross tells As It Happens guest host Laura Lynch. "This does go directly to their profit margin. Being completely fair, the banks in Canada are not short of profit." 
When the Bank of Canada last cut interest rates in January, it was by 0.25 per cent. The banks followed by cutting only 15 basis points. This week, the trend continues.Before the 2008 financial crisis, the banks usually matched cuts in interest rates by the Bank of Canada. Since then, it's been less predictable. 
"There are some people who are saying they are building future loss provisions because, obviously, there is a lot of consumer debt in the economy," Ross says. 
He doesn't buy that argument. 
"There has not been an increase in defaults in Canada, so, while there is a lot of consumer debt that's in the market place, Canadian consumers are wealthier now than they ever have been," Ross says. "And with rising real estate values, the big banks have a lot of collateral." 
He says that the rate cuts that banks have not passed on to consumers are beginning to add up. 
"It's significant math. In the last few years, they've built in . . . more than one per cent and so for a $400,000 mortgage, you're talking about $4,000 a year."
I'm certainly not one to defend the banks but in this case I'd have to say Mr. Ross is wrong. The idea that the banks need more profit is silly as the most profit comes when people can service their loans. Saying the banks are simply engaging in a money grab is over-simplifying the situation when in reality with interest rates supposed to be a gauge for risk and the BoC attempting to artificially lower risk the banks are having to take risk calculations into their own hands with the added bonus of padding their margins. Of course the banks are probably aware this surplus is temporary as now the real situation is becoming clear:

Alberta insolvency rates rise as oilsands slump
Vacancy rates increasing, rents dropping, for Edmonton tenants

This last link is interesting as really Fort McMurray should have made the headline as "Apartments are going for $500 a month less than they did a year ago.". Yes, that's right $500 decrease YoY, for rent. But 'what bubble' right?

So clearly Alberta, Canada's "job creation engine" isn't doing so well, and on the other hand the BoC is "puzzled" why their monetary policy hasn't had the effects on exports they have been expecting. Hmm, is it any wonder why consumer banks may be unsure about taking on unwarranted risk with even more loans?

Conclusion

This last interest rate cut will have a negligible effect just as the one in January did. These cuts come in the face of a global deflationary headwind which even a drop to 0% rates tomorrow would not counter. The BoC is effectively out of maneuvering room which is why talk of a "Canadian QE" has surfaced:
“The rapidly emerging debate addresses the question of whether the Bank of Canada stands willing to step into the realm of unconventional policies, in case the evolution continues to stubbornly track the downside scenario and not the baseline,” said Jimmy Jean, senior economist at Desjardins Capital Markets. 
Recent economic indicators show a Canadian economy that continues to struggle in the wake of a collapse in oil prices that began last year. Statistics Canada said Monday that wholesale sales for the month of May declined one per cent, compared with economist expectations that sales would be flat. That follows a disappointing manufacturing read last week, which showed that factory sales edged up only 0.1 per cent in May, compared with expectations of a 0.4 per cent rise. 
Unconventional monetary policy has been deployed by the world’s major central banks to jump start their economies in the past few years, including quantitative easing programs by the European Central Bank, the Bank of Japan and the U.S. Federal Reserve — the latter of which deployed three separate QE programs, buying trillions of dollars worth of U.S. Treasuries to push down long-term yields. 
But while quantitative easing is the first thing that comes to mind when discussing unconventional policy, there are a variety of monetary tools the BoC can deploy if it is forced to use its last remaining lifeline and cut its rate to zero. 
For instance, the bank could bring back forward guidance, which was introduced by former governor Mark Carney in 2009 and soon after adopted by other banks worldwide. Forward guidance involves communicating clearly to markets the conditions the bank sees as necessary for future rate hikes, and even potentially hinting at the timing of such hikes. Poloz decided to end explicit guidance in 2014 when he took over from his predecessor, saying it should be reserved for use in a “zero lower bound” environment.
Actually what forward guidance really is, is a lie. Forward guidance is a bank *saying* they're going to raise/lower rates hoping that the words and expectation itself is enough to move or contain markets. It's what the Federal Reserve is engaging in now with their warnings of rate hikes yet each and every time they have an opportunity to do it, they don't. Saying "forward guidance" is a tool of policy makers is akin to saying that "the boy who cried wolf" mobilized people effectively. Until the real crisis came, that is.

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Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading. He currently works for eQube gaming systems.

Nazayh Zanidean is a Project Coordinator for a mid-sized construction contractor in Calgary, Alberta. He enjoys writing as a hobby on topics that include foreign policy, international human rights, security and systemic media bias.

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