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Out of the Box: Once Upon a Time on Wall Street

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Once upon a time, there was a time, believe it or not, when a country, or a company’s, financial condition determined the interest rate, and the yield, of the borrowing entity. Ratings also came into play and were also a significant determining factor. As to the Fed, and the other central banks, they were once just part of the “Great Game” and now they dominate and control ALL of the “Great Game.”

The Fed meets this week and there is overwhelming sentiment that they will cut our interest rates. There is speculation by how much, but some sort of cut is pretty firmly baked into the cake. There are all kinds of arguments about why they will do this, and the timing of it, and when they do cut it will be a clear signal that the Fed has reversed course. I absolutely think they must cut America’s rates, and not because of the howling of Donald Trump.

The Fed was created by The Federal Reserve Act of 1913 and, with its own singular brand of “Independence,” for a central bank, they are still the central bank of the United States. They are in existence to help America, just America, and they are not empowered, or in actuality, the central bank of the world, regardless of the sometimes ridiculous statements we see occasionally in the Press. I make my case based upon the fact that America is now under financial assault by the nations in the European Union, Japan and Switzerland. Make no mistake, it is by these nations, themselves, as their central banks are controlled one hundred percent by their governments and have no “Independence,” at all, like our central bank was given.

You may think that the situation is benign, and that they are only trying to help themselves. I do not share this view. I think they know exactly what they are doing, and how it will affect America. Out through 10 years the sovereign yields in Switzerland, Japan, Germany, France, the Netherlands, Denmark, Austria et al are all less than Zero. This is not some form of demand driven phenomenon but it is caused directly, and absolutely, by the actions of their central banks who have created money from nothing and spent it buying their sovereign bonds, their corporate bonds and, in the cases of Japan and Switzerland, even on their equities.

The truth here is that they cannot afford their national budgets, their social programs, and the costs of the European Union, any longer. They cannot afford to raise taxes, they cannot afford, if the politicians wish to stay in power, to cut their financial obligations, and so they have found a novel way to pay for their costs of goods and services, which is to have their central banks print money, to pay for what they can no longer afford. All of this may have been born during the financial debacle of 2008/2009 but they learned that they could create negative interest rates, and get away with it, and that is what they have been doing ever since. This also allows them to control their currencies, without any market intervention, and this has been another boon for these countries.

You see, we are living in a kind of “Wonderland” where economic data has been ground to dust and all that really matters is what the central banks are doing, or going to do. Nothing else matters. Nothing else has much meaning.

“Thus, grew the tale of Wonderland.”

-Lewis Carrol, Wonderland

MarketWatch states that, “The European Central Bank on Thursday made clear it stands ready to cut rates and deliver ‘highly accommodative’ monetary policy, including additional asset purchases, in its effort to push stubbornly low inflation back toward its target amid signs of deteriorating economic conditions in the Eurozone.” The ECB is looking at expanding their Quantitative Easing program, cutting their base rate even further, from where it stands now, at  -0.40%, providing more low-cost loans to their banks, and even examining if they should buy equities. You may think this is European only but the ECB could follow Switzerland’s example and start buying foreign (U.S.) bonds and equities.

Oh my!

Mr. Draghi recently said that for the Eurozone a third-quarter rebound was “less likely now,” and he also stated that the financial condition of Europe is getting “worse and worse.” About 28% of the European economy is export-reliant. It seems that Mr. Draghi is prepping Europe for a currency war, that will be directed in just a few months by Christine Lagarde. The problem is that too many U.S. economists, and money managers, see the projected Federal Reserve rate cut next week as unnecessary because they only look at our domestic macroeconomic data, and they just don’t get it that Europe, Japan and Switzerland, in helping themselves, are also knowingly and deliberately coming after us.

“This piece of rudeness was more than Alice could bear, she got up in great disgust, and walked off…”


There is a two-step process that is about to ensue, in my opinion. The first, as interest rates and borrowing costs fall, will be equities up, Real Estate up, REIT’s up, both IG and HY bond prices up, asset prices, of all types, up, equity buybacks rising and this may continue for some years. Then, as lowered rates no longer move the needle, because we get to Zero rates, or close to them, the markets will no longer be pushed by lower rates and then all of the markets will either stabilize, at some level, or they will fall back as lower rates lose their ability to buoy all the markets and asset prices.

“The Red Queen shook her head. “You may call it ‘nonsense’ if you like,” she said, “but I’ve heard nonsense, compared with which that would be as sensible as a dictionary!”

-Lewis Carroll, Wonderland


Mark J. Grant
Chief Global Strategist, Fixed Income
Managing Director
B. Riley FBR Inc.
U.S. 954-468-2366

Information herein is for general use; is not unbiased/impartial; is current at publication date, subject to change; may be from third parties; and may not be accurate or complete. Opinions are the Author’s, not B. Riley FBR, Inc., or their respective affiliates or subsidiaries. This is not a research report or solicitation or recommendation to buy/sell the subject securities. Investment factors are not fully addressed herein. B. Riley FBR Inc. and their affiliates may have a proprietary position in the subject securities.
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