“IT’S LIKE THE BLIND LEADING THE BLIND”

Fuck me....

Does the current batch of Central Bank leaders really have a clue about what is going on in the real world? Because they seem very content to manage firefighting scenarios in the limelight on TV but actually appear to do little on proactive management of their areas of responsibility.

Let me elaborate here...

Over the past two weeks I have listened to the ECB, FED, SNB, NORGES BANK and finally the BOE. Like a bloody idiot, I waited and waited and waited some more for something close to the truth or at best a dose of pseudo reality or something upon how I as a Forex trader could use to see which way the Central Banks were leaning into the longer terms. Basically, these leaders are bereft of a definitive direction and are more than happy to remain stuck, they are in wait and see mode; waiting for the next shoe to drop.

Over the past few months in particular, I’ve talked a lot about narrative. This is crucial moving forward especially about having and maintaining a trading conviction. Frankly, at the moment, we have a herd of Central Bankers lacking any substantive credibility, trying to control and deliver a narrative that they believe to be ones of decisiveness, direction, conviction, and credibility whilst, without exception they have all been leaders asleep at the wheel as a BANKING CRISIS developed on their watch. They hope the threatened CONTAGION will disappear as quickly as it came so that they can sweep the past two weeks under carpet. From a trading perspective it looks like the rollercoaster ride is set to continue.

Over the past two weeks, the ECB and SNB continued with a stronger conviction to tackle inflation, not put off by BANKING CONTAGION RISKS. The FED however, backed off, possibly knowing something we do NOT know vis-à-vis the BANKING CONTAGION, it’s hard to know the real reason as the inflation battle is far from being beaten.

This month, the top 10 US Reginal Banks have seen their stock price drop as follows: -

First Republic -89%
PacWest -64%
Western Alliance -55%
Zions Bank -42%
Commerica -38%
First Horizon -36%
East West Bank -28%
Fifth Third -27%
Citizens Financial -26%
M & T Bank -24%

I look at this list and every time I hear a Central banker or Politician tell you not to worry about banks... it just makes me wonder what the hell is going on in the background.

Let me recap here...

SILICON VALLEY BANK (SVB) was the second largest bank in the history of the US to fail and it happened on Powell’s watch. The FED was caught asleep at the wheel vis-à-vis oversight. One might say that if local FED Presidents spent more time managing the local Regional Banks and less time giving sound bites on interest rates and FED policy, the recent Regional Bank issues may not have surfaced. Don’t forget this time last week we were alerted to another 200 US Regional Banks with similar issues to SVB.
SIGNATURE BANK in NY closed over a weekend, two weekends ago. There was a run on FIRST REPUBLIC BANK (14^th Largest in the US) which was given a huge cash injection by its rivals to say afloat. It’s still not out of the water yet.
CREDIT SUISSE was bailed out by the Swiss Government and a shotgun marriage of a takeover by UBS was forced through.

All we have heard recently is the same story from every Central Banker. All is good, nothing to see here. This is true until there is something to see.... it’s all being swept under the carpet.

Moving on...

The markets see something. It is NOT helped when Powell and Yellen are not on the same page. During Powell’s FOMC Press Conference last week, he was proclaiming that all bank deposits are guaranteed at the same time Yellen in the Senate says that she is no longer considering backing all deposits.

Powell says no rate cuts in 2023, BUT the markets have 4 rate cuts priced in by December 2023. The markets are clearly saying that the FED is lying.

In addition, in the past two weeks the FED Balance Sheet has grown by USD$400Billion, which has wiped out over 50% of the Quantitative Tightening (QT) reduction it had in place once they started a tightening cycle. ALL IS NOT GOOD.

Moving on a step...

Look, Powell recently showed his hand to the Senate Banking Committee. His approach to fix inflation is to make a few million jobs disappear, create unemployment, basically a mess. The mess I call a RECESSION. The question is of course, how can the FED control the number of those who lose their jobs? We all know full well that the FED has zero, absolutely NO control over this factor.

With regards to THE BLIND LEADING THE BLIND...

The ”DOT PLOT” from last week’s FED meeting shows that next year the current batch of FOMC voting members see US interest rates between 2.2% and 5.5% These are all very wide parameters and show that IT’S LIKE THE BLIND LEADING THE BLIND how can we take what is being served up us as anything more than guesswork; a shot in the dark.

In my opinion, the FED chicken out with regards to not sticking to its guns fighting inflation. This uncertainty and dithering have allowed the market to feed on this.

Obviously, some will say it wasn’t stalling, and that it was better than pausing following the US Regional Banking Crisis as a pause would indicate complete indecision. Banking in the 21^st century is all about CREDIBILITY & CONFIDENCE, listening to Powell last week I came away with the opinion he has very little of this left.

The FED is a long way away from beating inflation. As I have said before the 2% target is the equivalent of a noose and whilst I think the 2% target is a great objective, I think a tiered approach target over the next 2 or 4 years to return to this level is more realistic than expecting a quick 12-18 month fix, which frankly is unrealistic. We can all see that SECONDARY EFFECT inflation is taking root in many economies and COST OF LIVING (Food and Energy) inflation is to a large extent out of control through pure profiteering in some instances. Much work on inflation still needs to be done.

As mentioned earlier, Powell’s route to beat inflation is to break the US economy and by default take the US into RECESSION. However, his route is a dangerous one as Central Banks do NOT have the policies to limit the depth of a self-induced RECESSION. Interest rate control is blunt at best.

Central Bankers around the globe fell into line copying the FED with TRANSITORY. The belief that the FED has all the answers is misplaced in my opinion given recent events. We wait and see how this develops over the coming weeks and months ahead.

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The Pip Accumulator

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BLOG VERSION: #496 FREE NEWSLETTER
DATE: 26th March 2023