Last week’s meeting of major oil producers in Doha was a farcical attempt to foster belief that the glut of crude could be magically brought back into balance by agreeing to maintain current high production levels without cuts and with no real assurance that production levels would be enforced anyway. In the end, the meeting was a total failure with nothing accomplished. Nonetheless, crude had rallied off the February lows in recent weeks as various pundits held Doha out as an important turning point even as tankers full of crude lined up around the planet due to the glut and U.S. inventories remained enormous. This chicanery had caused equities to rally because the computers trade crude and the S&P 500 in an inane lockstep.
The purported gist of the recent secret central planner dealings is that they are attempting to manage the global currency war in a manner that keeps events from cascading out of control. While we do not really know if that is the case, there are some obvious issues. First, to boost its economy and to keep deflation at bay, China desperately needs the once soaring U.S. dollar to cheapen because its currency is linked to the greenback. Secondly, Japan wants the dollar to rise versus the yen to foster export growth if only to show some positive effect of its gargantuan monetary policy bets. Further confounding matters for all central bankers is the fact that the BOJ’s QE and negative rate schemes are looking like a miserable failure. The yen has rallied meaningfully and Japanese stocks have been less than enthusiastic as the economy remains moribund.
In the U.S., dismal earnings reports from Goldman Sachs and some of the big banks in recent days highlight that Wall Street is feeling serious pain and credit quality is a big issue. We would also suggest that these weak reports make it clear that monetary policy efforts have been exhausted because if the financial sector is struggling mightily in the current environment of extreme central bank largesse, then it must mean those same policies have outlived their usefulness. The transfer mechanism of money to the real economy is sputtering.
Nonetheless, the PhD’s keep trying and negative rates are supposed to be their next great idea. However, the “fly in the ointment” is the reality that this has been greeted less than enthusiastically by markets if you look at financial stock behavior and listen to various titans of banking and investment. Of course, common sense would suggest that bank deposits will flee rapidly if the deciders push this negative rate idea too far and that cannot be good. More recently, the central bankers are publicly mentioning printing money that is to be given directly to consumers. While some in the ECB sees this quackery as just a natural progression, the Germans want none of it for now anyway. Even former Fed chairman Bernanke revisited the topic of “helicopter money” recently. Yet somehow, we are all supposed to believe that everything is back to normal and the Fed could normalize policy.
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