Sunday, 18 January 2015

Who is rigging the market now?

In the run up to the credit crunch the market manipulations perpetrated by the world’s largest investment banks are now well known to us.  The banks rigged many of the important markets required for the global economy – proprietary trading held sway, credit and other derivative products were miss-sold, reference interest rates (Libor and others) were fixed and so it goes on.  Fortunately for us governments around the globe and their central bankers have been on a mission to sort out these market abuses.  The Wolves of Wall Street have been tamed by the Gnomes from Zurich, the ECB and the Fed – all very reassuring.  That is until one looks closely at the market manipulation now being pushed through by Central Banks culminating in the completely unexpected decision of the Swiss National Bank (SNB) to remove the 1.20 floor on the Swiss franc against the Euro.

Anything the banks can do .....

As Gavyn Davies tells us this was “one of the biggest currency shocks since the collapse of the Bretton Woods system in 1971. The decision has been heavily criticised, both for its tactical handling of the foreign exchange market, and for the collapse of the centrepiece of its monetary strategy, without (apparently) any overriding cause. The credibility of a central bank that has traditionally been hugely respected by the markets has clearly been dented.”

Central banks have been having a field day saving the world from depression – first we had the huge credit stimulus (bank bail-outs) then rounds 1 and 2 of QE, followed by forward guidance and the big bazooka and more recently we have had the shenanigans around QE in the Eurozone, which prompted the move by the SNB.

Central Bankers assumed the mantle of superheroes in 2008 as they helped navigate the world economy through the wreckage created by the political decision to let Lehman Brothers go to the wall.  They had a good start but more recently they seem to be losing the plot.  The growing inertia around deflation and the legitimacy of QE in Europe have undermined the view that Central Bankers can do no wrong.  The final straw was the move by the SNB, which creates some profound implications for the credibility of the wider market interventions by global central banks, on which asset prices currently depend.  As part of the package the SNB has now set a negative interest rates on some deposit accounts of -0.75 per cent. If this proves effective, other central banks may follow suit. And, over time, that may take global bond yields further into negative territory and set asset prices soaring once again.

It is important to see that QE is also a market abuse as the processes effectively acts as a bail-in of indebted governments (through inflation and growth) by longer terms savers who have to rely on fixed income instruments. These savers are in fact middle class often low income families who pensions are being destroyed by QE the sole aim of which is to reduce long-term interest rates.  Perverse isn't it that the very economist who propose the use of QE so vociferously are on the left of the political spectrum!

I guess the question is who’s market rigging has been the most damaging:  the under-regulated investment banks or the over-zealous Central Banks.  In 2009 the answer was pretty obvious but today it’s a tighter judgement call.  The overly public ministrations of the Central Banks allow the market participants the opportunity to bet with the bank and this tacit and symbiotic relationship, where investment banks repair their balance sheets at the expense of national balance sheets (the tax payers) is starting to look pretty ugly.  Over the last 5 years we have seen:

  1. Bank bail-outs – government cash for banks
  2. QE that pumps up asset prices to the great benefit of banks as they can bet on asset prices rising with no fear of market downturns
  3. Negative real long term interest rates that have driven the bond markets higher and higher

These one way bets have allowed the Central Banks to re-capitalise the investment banks (at the expense of the tax payers) whilst providing a smokescreen of fair play. The move by the SNB was the first indication that this unholy alliance may be coming to an end, the surprise was somewhat welcome!

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