First Impressions

Jackson Hole Wonkweek
Doug Ashburn – JLN

The world’s central bankers, policy wonks and other financial bigwigs head to Jackson Hole, Wyoming this week for the annual retreat sponsored by the Kansas City Federal Reserve. Even though it has been four years since then-Fed Chairman Ben Bernanke surprised the markets by using Jackson Hole as the springboard for the second round of quantitative easing (QE2), I would not expect any fireworks this year.

My guess is it will be more of the same narrative, which is that the world is much better off than in the aftermath of the crisis, but not so good that we can normalize interest rates.

One possible place where the central bankers can push the envelope is in assessing the state of labor markets. In fact, the working title for this year’s conference is “Re-evaluating Labor Market Dynamics.”

Will they re-evaluate labor market dynamics this year? I hope so. A true assessment, however, would cut into the two chief activities at Jackson Hole – back-patting and barbecue. Will, for example, central banks discuss the recent report by the Bank for International Settlements, which said the ultra-low interest rates are creating a “permanent instability?” Has the policy response since 2009 created an even bigger, untamable monster by simply pulling forward future economic gains to pay for today’s level of consumption? Has the “blunt instrument” nature of monetary policy created unintended consequences such as malinvestment (as say the Austrian school economists) and income inequality (as highlighted in Thomas Piketty’s “Capital in the 21st Century”)?

If, by the end of the week, the financiers and policy makers are experiencing a bit of indigestion, it may not be from the ribs and baked beans. It may be conversation between meals.

Quote of the Day

Investors who panic in these selloffs—it’s the wrong thing to do.

Gershon Distenfeld, director of high yield for AllianceBernstein, as quoted in the WSJ story “Big Investors Snap Up Junk Bonds”

Lead Stories

Central banks in focus as experts gather at Jackson Hole
Gavin Jackson – Financial Times
Central banks will be the focus this week with central bankers, policy makers, academics and financiers gathering in Jackson Hole, Wyoming, on Thursday for the Kansas City Federal Reserve’s annual symposium as well as minutes from the latest meetings of the Federal Reserve’s Open Market Committee and the Bank of England Monetary Policy Committee released this week.

China’s First Bond Default in Focus as Debtholders Meet
Holders of China’s first corporate bond to default onshore plan to meet today in Shanghai, as investors look for clues on how the government will balance market liberalization with steps to maintain stability.

***DA: Ironically, this default is a sign of the strengthening of China’s financial markets.

Big Investors Snap Up Junk Bonds
Katy Burne – WSJ
Large institutions are snapping up U.S. junk bonds, taking advantage of a price slide triggered by an exodus of individual investors. Many big money managers say they remain bullish on these risky corporate bonds despite concerns that the market is overheated and worries that geopolitical unrest could fuel a rush to safer assets.

***DA: Downticks are still buying opportunities, until they are not.

Fighters of BOJ Missing Safest Returns Since 1993
Mariko Ishikawa and Shigeki Nozawa – Bloomberg
Investors that chose to fight the Bank of Japan’s effort to drive down sovereign bond yields are missing out on the best risk-adjusted returns in two decades.
JGBs returned 2.6 times the market’s volatility this year on an annualized basis, poised for the best year since 1993, according to data compiled by Bloomberg and the European Federation of Financial Analysts Societies. BOJ Governor Haruhiko Kuroda has said about 7 trillion yen ($68 billion) of monthly debt purchases will shrink Japan’s risk premiums.

High-yield bond funds worldwide post fifth straight wk of outflows – BofA
Investors worldwide pulled $2.4 billion out of high-yield junk bond funds in the week ended August 13, marking the fifth straight week of withdrawals from the funds, data from a Bank of America Merrill Lynch Global Research report showed on Friday.

Bond Liquidity Risk in $3.5 Trillion Funds Defused by Cash Pile
Cordell Eddings – Bloomberg
The record $3.5 trillion stockpiled in U.S. fixed-income funds is raising the specter the bond market will buckle under the strain of redemptions once interest rates rise. Simple math suggests there’s little need to worry.

***DA: That is just what they want you to think.

Beware ‘Rate Rage’ in Taper Tantrum Sequel, UBS’s Hatheway Says
Alastair Marsh – Bloomberg
The selloff in global stocks and high-yield bonds this month was just a dry run for what will come after the Federal Reserve winds down its bond purchases, according to UBS AG. (UBSN)
While the price declines appear to be a healthy adjustment rather than the start of a full-blown market correction, uncertainty about U.S. interest rates remains a significant source of concern, Larry Hatheway, the London-based chief economist at UBS’s investment bank, wrote in a report today.

Holders of Argentina eurobonds plan to appeal U.S. court ruling
Holders of euro-denominated Argentine bonds plan to appeal a U.S. judge’s ruling blocking the country from making payments on their debt, according to a court filing on Friday.

***DA: This episode is far from over.

News Brief: SunGard & FTA Study Identifies Trends Impacting Australian & New Zealand Treasuries
As security concerns and the need for additional resources continue to drive IT investment for treasury functions, a study conducted by SunGard and the Finance and Treasury Association in Australia (FTA) has identified that 48% of Australian and New Zealand treasury systems are now cloud-based.

Central Banks

Lunch with the FT: Raghuram Rajan
James Crabtree – Financial Times
Dark monsoon rain clouds hang over Mumbai, as I gaze down at the city’s gothic skyline from the 18th floor of the Reserve Bank of India, waiting for Raghuram Rajan to arrive. It’s a suitably stormy backdrop against which to contemplate my guest’s first year in charge of India’s central bank.

***DA: It was a dark and stormy night – sounds like the beginning of a bad novel.

Why Draghi’s Cheap Cash Offer to Banks May Lack Appeal
Alessandro Speciale, Jana Randow and Joshua Robinson – Bloomberg
Mario Draghi’s promise of cheap cash for banks betting on the euro-area revival is losing its allure.
Economists in the Bloomberg Monthly Survey cut their estimate of the take-up of funds under a program designed to boost bank lending. The reduction signals concern that the outlook for the currency bloc may be too weak to drive demand for loans, undermining a policy the European Central Bank president says is key to restoring the region’s health.

The Outlook: Federal Reserve Bets Rate Rise Can Wait
Jon Hilsenrath – WSJ
Updated Aug. 17, 2014 8:21 p.m. ET

In a recent Wall Street Journal survey, 30 private economists said they feared the Federal Reserve would wait too long before raising short-term interest rates, while only three said they feared the Fed would move too early. Will the Fed fall behind the curve and keep interest rates too low for too long as the economy strengthens?

***DA: In looking around the world, we see countries who tightened too early and are now facing deflation and must cut, cut cut.


Russia Widens Ruble Trading Band in Move Away From Managed Rate
Vladimir Kuznetsov and Olga Tanas – Bloomberg
Russia’s central bank widened the ruble’s trading band and reduced the amount of foreign exchange it will buy and sell as the world’s largest energy exporter moves away from managing its currency.

***DA: Get the volume flowing back into the CME’s Ruble contract. I know some guys who would like to make back the money they lost in 1998.

Caplin Launches App to Enable Trading FX Spot, Forwards and Swaps on Mobile
Avi Mizrahi – Forex Magnates
The e-distribution specialist and single-dealer platform technology provider, Caplin Systems, announced today that it is launching Caplin FX Mobile. Built in HTML, the new app enables a bank’s clients to monitor and manage FX orders via their smartphones and tablets. Already licensed by a major Asian bank, the new product is already being tested by a number of financial institutions around the world, according to the developer.

Banks Cast the Net Wider to Re-Staff FX
Chiara Albanese – MoneyBeat – WSJ
Banks are slowly starting to restock their senior foreign exchange staff after a global investigation into the currencies market saw some firms fire or suspend a slew of employees.

Investigators work to close the net in Mt Gox probe
Ben McLannahan in Tokyo – Financial Times
Six months on from the apparent theft at Mt Gox, once the world’s biggest Bitcoin exchange, the net could be beginning to close.

Bitcoin is small change in financial innovation
James Mackintosh – Financial Times
When it comes to losing money on a grand scale, George Osborne’s Bitcoin withdrawal last week does not meet the standards of his predecessor. True, the UK chancellor’s bitcoins dropped 13 per cent in 10 days, an annualised loss of 99.8 per cent, but Royal Bank of Scotland shares scored an annualised loss of 99.99 per cent after the bank was rescued by the Treasury. Better still for taxpayers, Mr Osborne’s PR stunt was paid for by the ATM maker.

BitBeat: Bitcoin Bulls Get a Buying Opp; Bitcoin Anarchists Declare Their Independence
MoneyBeat – WSJ
Bitcoin’s cryptoanarchists are getting rowdy. The cryptocapitalists are busy parrying back and forth with regulators like New York’s Benjamin Lawsky over just how much oversight is healthy for the nascent digital currency and the industry that is growing up around it.

Indexes & Index Products

FTSE to keep sanctioned Russian banks in indexes for now
Stock index compiler FTSE has decided to keep Russia’s banks Sberbank and VTB in its indexes for now but would exclude them if they issued new shares, it said late on Friday.

Change of the ETF guard in US
Deborah Fuhr – Financial News
Institutions have grown their lead over the retail sector as the largest group of investors in US-listed ETFs. Assets invested in US products increased by a little more than 26% from $1.34 trillion, to reach a record $1.7 trillion at the end of last year.

ETF shoppers become more selective
Peter Davy – Financial News
Price wars continue in the exchange-traded fund market as providers seek to gain market share in Europe. However, investors say costs are just part of the puzzle when it comes to choosing an ETF.


Oklahoma Moves Towards the Gold Standard
Keith Weiner – Forbes
There is strong opposition to any proposal to end the Federal Reserve and move away from its paper dollar. The Fed has many ideological and, of course, crony supporters. So it’s interesting that there was little controversy in Oklahoma around removing one of the obstacles to the use of gold as money. Republican Mary Fallin, the governor of the Sooner State, signed into law legislation that recognizes gold and silver as money. There was bipartisan support, particularly in the state Senate.
Oklahoma doesn’t force anyone to accept gold or silver in payment. It simply exempts them from state sales tax. While sales tax on the metals was probably a minimal source of revenue for the government, it was certainly a major competitive disadvantage to bullion dealers. Price sensitive buyers simply shopped out of state.

Gold’s grim false dawns
Jonathan Eley – Financial Times
Since the start of a year characterised by unexpected geopolitical events, the gold price is up 7.3 per cent in dollar terms. Thanks to the appreciating pound, the return in sterling has been lower, at 4.9 per cent. Shares, as measured by the All share index, are down about 1.8 per cent while Bloomberg’s UK sovereign bond index is up 5.7 per cent.

Has Gold Become a Bad Investment in India? – India Real Time
Shanoor Seervai and Debiprasad Nayak – WSJ
Indians love gold, they cover their brides and shower their temples with the precious metal, traditionally used as a sparkling insurance policy and inflation hedge to be cashed in when needed. While the South Asian nation is the world’s second largest consumer of gold after China, it seems to be losing some of its appetite for the precious metal as an investment.

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