'Communication Breakdown' As The Fed Loses Street Cred

Just as this article was being finished, we got a one-two punch from China People’s Bank and the ECB. The Fed for now has painted itself into a corner with a series of dramatic reversals and a deluge of contradictory statements. Now the friends are here to help.

First, Mario Draghi suggested that ECB’s December will not only examine more stimulus measures, he actually suggested that Europe will employ new types of stimulus, hitherto not seen. Some analysts suggested that ECB will start buying stocks; others are talking about ‘people’s QE’ better known as ‘helicopter money’. Some journalists are demanding ECB act ‘unconventionally’ as if the global QE experiment to date could ever be called ‘conventional.’

And then shortly after Draghi’s comments People’s Bank of China cut interest rates by 25 basis points, the 6th decrease since November! PBC also reduced reserve requirements for banks. Chinese stocks jumped up and margin debt is higher again.

Will this Lonely Hearts’ Club Band effort work? The problem is that the Fed is the key central bank in the food chain. The credibility of ECB or PBC is never going to surpass that of the Fed and partially rests on it, simply because their impact on the global economy is much smaller. So, all they can do is give the Fed some breathing room, but they cannot really turn the tide of credibility in central banks’ favor.

Ultimately, we will likely see a QE4 and QE5 from the Fed regardless of what they will be called. But their effect will not be as large as previous rounds, due to the very same credibility problems (and other issues surrounding the shortage of high quality assets to monetize). That is setting the stage for ‘unconventional’ measures like purchasing stocks or corporate debt. If that does occur, we could see a phenomenal speculative rise in the value of those assets. But until we get to that point, it might be prudent to watch from the sidelines.


Daniel Satchkov is president of RiXtrema, a risk modeling and consulting firm, and creator of Advisor BioniX, the first risk-aware robo platform for advisors.