FED, ECB, CENTRAL BANKS CUT RATES IN COORDINATED MOVE

     Oct. 8 (Bloomberg) -- The Federal Reserve, European Central

Bank and four other central banks lowered interest rates in an

unprecedented coordinated effort to ease the economic effects of

the worst financial crisis since the Great Depression.

     The Fed, ECB, Bank of England, Bank of Canada and Sweden's

Riksbank each reduced their benchmark rates by half a percentage

point. The Bank of Japan, which didn't participate in the move,

said it supported the action. Switzerland also took part. China's

central bank separately cut its key rate 0.27 percentage point.

     ``We are now looking at the first page of the global-

depression playbook,'' said Carl Weinberg, chief economist at

High Frequency Economics in Valhalla, New York. ``The only

solution is to cut rates as close to zero as you dare,'' pump

money into the banking system ``hand over fist'' and increase

government spending, he said.

     Today's decision follows a global meltdown that sent U.S.

stock indexes heading for their biggest annual decline since

1937; Japan's benchmark today had the worst drop in two decades.

Policy makers are also aiming to unfreeze credit markets after

the premium on the three-month London interbank offered rate over

the Fed's main rate doubled in two weeks to a record.

                            Rate Levels

     The Fed reduced its benchmark rate to 1.5 percent. The ECB's

main rate is now 3.75 percent; Canada's fell to 2.5 percent; the

U.K.'s rate dropped to 4.5 percent; and Sweden's rate declined to

4.25 percent. China cut interest rates for the second time in

three weeks, reducing the main rate to 6.93 percent.

     Stocks at first rallied after the announcement, then turned

lower. Some analysts said the central banks should have lowered

rates by more, and predicted further reductions. Economists at

Goldman Sachs Group Inc. and Morgan Stanley now project another

half-point move by the Fed at its Oct. 28-29 meeting.

     The Standard & Poor's 500 Stock Index fell 1.1 percent to

984.94 at the close in New York, capping a 16 percent loss in six

trading days. Europe's Dow Jones Stoxx 600 Index slumped 6

percent. Japan's Nikkei 225 Stock Average lost 9.4 percent to

9,203.32 earlier today, before the announcement.

     ``The recent intensification of the financial crisis has

augmented the downside risks to growth and thus has diminished

further the upside risks to price stability,'' the central banks

said in a joint statement today. ``Some easing of global monetary

conditions is therefore warranted.''

                          World Recession

     Global policy makers are reducing rates as economies weaken

around the world. The International Monetary Fund said the global

economy is heading for a recession in 2009 and increased its

estimate of losses from the financial crisis to $1.4 trillion.

     The crisis already prompted the U.S. to enact a $700 billion

program to buy troubled assets from banks in an effort to prop

them up. U.K. banks will get a 50 billion-pound ($87 billion)

government bailout, while Spain will spend as much as 50 billion

euros to buy bank assets. European governments have also moved to

rescue banks Fortis, Dexia SA and Hypo Real Estate Holding AG.

     The U.S. Treasury said today it sees ``severe dislocations''

in the government bond market and plans to sell more debt to

address shortages. The market problems ``are across the Treasury

market curve'' and are primarily affecting medium- and long-term

debt, from two-year notes through 30-year bonds, a Treasury

official told reporters.

     The Fed's Open Market Committee, which voted unanimously for

today's move, said in its statement that ``incoming economic data

suggest that the pace of economic activity has slowed markedly in

recent months. Moreover, the intensification of financial-market

turmoil is likely to exert additional restraint on spending.''

                        Europe's Reversal

     European policy makers were forced into action after the

collapse of Lehman Brothers Holdings Inc. last month roiled world

financial markets and caught them off guard. The ECB raised rates

in July and Bank of England Governor Mervyn King warned the

government as recently as Sept. 16 that inflation was set to

accelerate.

     The decision to let Lehman go ``had enormous, very

unfortunate consequences,'' European Central Bank President Jean-

Claude Trichet said Oct. 2. On the same day, he signaled the ECB

was ready to cut rates.

     ECB council member Ewald Nowotny said in an interview that

today's rate reduction ``should not be seen as a first step in a

possible series'' by the ECB. ``The situation has to be assessed

as we go along,'' and the current rate level ``will ensure that

inflation expectations remain anchored,'' said Nowotny, chief of

Austria's central bank.

                      Deteriorating Economy

     Today's action comes a day after Fed Chairman Ben S.

Bernanke failed to assuage investors' concerns about the

deteriorating economy by signaling he was ready to lower

borrowing costs.

     Fed officials, who have kept their benchmark rate at 2

percent since April, may have wanted time for their record loans

to the financial industry and new programs, including purchases

of commercial paper, to bear fruit before lowering rates.

Investors instead perceive the economic outlook deteriorating

more rapidly, necessitating rate reductions.

     The declines in U.S. shares the past two days followed pre-

market opening announcements of fresh actions by the Fed to

unblock credit markets. On Oct. 6, the U.S. central bank doubled

its planned auctions of cash to banks to as much as $900 billion.

Yesterday, it unveiled a unit to buy commercial paper, debt used

by companies for short-term funding.

     Central bankers acted two days before they gather with

finance ministers from the Group of Seven industrial nations in

Washington. The timing suggests the central banks sought to avoid

any appearance of being influenced by governments, said Ted

Truman, former chief of the Fed's international-finance division.

                          `Before Friday'

     ``It was clear that if they wanted to do it, they had to do

it before Friday,'' said Truman, now a senior fellow at the

Peterson Institute for International Economics in Washington.

``they don't want to see as being coordinated by their finance

ministers into doing this.''

     Both U.S. presidential candidates said they backed the Fed's

rate cut. Democrat Barack Obama said more was needed and said he

hoped the global coordinated response to the crisis continued at

the G-7 meeting of finance leaders in Washington this week. Both

he and Republican John McCain said the Fed action had to be

accompanied by further moves to help homeowners.

     Obama has surged in polls in the past three weeks as the

credit freeze worsened and global equity markets plunged, with

respondents saying he would do a better job managing the economy.

An NBC-Wall Street Journal poll conducted Oct. 4-5 found Obama

supported by 49 percent of registered voters, a 6-point margin

over McCain. Two weeks ago an NBC-Journal poll put Obama's lead

at 2 points.

                         Bernanke Message

     Bernanke said in a speech yesterday that an intensifying

credit crunch means officials must ``consider'' lowering

borrowing costs.

     In more typical market conditions, stocks rally when a Fed

chief indicates he'll reduce rates. Now, Bernanke's message may

have less power because traders already anticipated for weeks

that policy makers would need to make that move, and because of

rising concern even rate cuts may do little to immediately help

banks scrambling to reduce their vulnerability to loan losses.

     ``This is an extraordinary circumstance,'' said Former Fed

Governor Laurence Meyer, now vice chairman of Macroeconomic

Advisers LLC. ``If markets are totally frozen it doesn't help. It

certainly builds confidence psychologically.''

By Scott Lanman BLOOMBERG

LYING, CHEATING BANKERS - ECONOMIST

Lying, cheating bankers

Talking about their work makes bankers more dishonest

“IF YOU can only be good at one thing, be good at lying…because if you’re good at lying, you’re good at everything.” Thus a wag imagined one investment banker advising another in a lift. He may not have been far wrong.

In an experiment published by Nature this week, 128 bankers with an average of 12 years’ experience in the industry were split into two groups. The “control” group was asked a series of anodyne questions—for instance, how many hours of television they watched each week. The “treatment” group was quizzed on their work at their bank.

Each banker was then asked to toss a coin in private ten times and report the results. For each toss they could win $20, depending on whether the coin landed on “heads” or “tails”. (If it landed on the wrong side, they got nothing). The bankers reported the results of their ten flips on a computer, and received payment automatically. With enough lucky flips—or shameless lying—a banker could easily make $200 in a matter of seconds.

In both groups, workers from the red-blooded bit of banking—traders and the like—were more dishonest than those in ancillary jobs. Overall, however, the control group was quite honest: they reported that 52% of their tosses had been winners, only slightly above the probable outcome of 50%. The treatment group, in contrast, said that they had got lucky 58% of the time. Nearly a tenth of the treatment group claimed the full $200, despite there being a one-in-a-thousand chance of this happening to an honest flipper.

It was not merely talk of stocks and shares that made people more deceitful: when the authors tried that trick on non-bankers, there was no effect. And people in other professions—say, those in computing and pharmaceuticals—did not become more dastardly when the researchers asked them about their work.

The authors posit that the discussion of work may have put the treatment group into a more materialistic frame of mind: more of them than in the control group agreed with the notion that social status was primarily determined by financial success, for example. Another possibility, about which the authors are sceptical, is that the people in the treatment group were more prepared to lie because their professional identity had taken centre-stage; the feelings of the person inside the suit became less important.

Banks say they are trying to stamp out dishonesty among their staff. Some now make employees attend ethics classes. The researchers want bankers to take the financial equivalent of the Hippocratic Oath, doctors’ promise to “do no harm”. The Netherlands introduced one at the beginning of 2013, in which moneymen solemnly affirm their “responsibility towards society”. But it may not be the bankers who are the problem so much as the setting.

SNB INTRODUCES NEGATIVE INTEREST RATES

Swiss National Bank introduces negative interest rates

Minimum exchange rate reaffirmed, and target range for threemonth

Libor lowered into negative territory

The Swiss National Bank (SNB) is imposing an interest rate of –0.25% on sight deposit

account balances at the SNB, with the aim of taking the three-month Libor into negative

territory. It is thus expanding the target range for the three-month Libor to –0.75% to 0.25%

and extending it to its usual width of 1 percentage point. Negative interest will be levied on

balances exceeding a given exemption threshold.

The SNB reaffirms its commitment to the minimum exchange rate of CHF 1.20 per euro, and

will continue to enforce it with the utmost determination. It remains the key instrument to

avoid an undesirable tightening of monetary conditions resulting from a Swiss franc

appreciation. Over the past few days, a number of factors have prompted increased demand

for safe investments. The introduction of negative interest rates makes it less attractive to hold

Swiss franc investments, and thereby supports the minimum exchange rate. The SNB is

prepared to purchase foreign currency in unlimited quantities and to take further measures, if

required.

An instruction sheet containing additional information on the negative interest rate and the

calculation of the exemption threshold is attached.

http://www.snb.ch/en/mmr/reference/pre_20141218/source/pre_20141218.en.pdf

YEN SEEN AT 200 BY OPPOSITION LAWMAKER DOUBTING ABE

Takeshi Fujimaki, a banker turned opposition lawmaker, said the yen will slide to 200 per dollar once the Bank of Japan can no longer “camouflage” the nation’s default risk.

The yen has dropped more than 20 percent since April 2013 as the BOJ bought Japanese government bonds, reducing borrowing costs on the world’s heaviest debt load to below zero on notes maturing in two years or less. The currency traded at 119.42 per dollar as of 10:12 a.m. in Tokyo. The cost to protect JGBs against non-payment climbed to a 13-month high of 62 basis points yesterday after Moody’s Investors Service cut the sovereign rating ahead of the Dec. 14 elections called by Prime Minister Shinzo Abe.

“Once investors see Japan’s fiscal default through the BOJ’s camouflage, the yen will spiral out of control to 200 per dollar and beyond,” Fujimaki, a former adviser to investor George Soros and who won his upper house seat on a Japan Restoration Party ticket in July 2013, said in an interview in Tokyo on Dec. 1. While the currency will only drop to 140 next year, he said, “we’re still at the early part of the yen’s large-scale depreciation.”

Japan’s lower-house election campaign officially started yesterday, with the focus on Abe’s economic policies after the country slid into recession. Some opposition lawmakers have pointed out that the weaker yen is raising costs for consumers, while others say Abe must reduce government spending. The ruling Liberal Democratic Party says Abenomics has created jobs and spurred a rally in financial and property markets.

‘Deflationary Mindset’

Abe called the election to seek public support for his decision last month to postpone a sales-tax increase needed to rein in Japan’s ballooning debt by 18 month. When the BOJ expanded monthly bond purchases to as much as 12 trillion yen ($100 billion) on Oct. 31, it cited a risk that weak demand and cheaper oil could delay an end to Japan’s “deflationary mindset.”

Consumer prices excluding fresh food increased an annual 2.9 percent in October slowing from 3 percent in the previous month, official data showed Nov. 28. Stripped of the effect of April’s consumption levy increase, core inflation was 0.9 percent, less than half of the BOJ’s 2 percent target.

“The BOJ used consumer prices as an excuse to add stimulus and continues to hide that it’s monetizing government debt,” said Fujimaki. “But the truth is that Japan will default unless the BOJ continues to buy JGBs even after inflation accelerates beyond its intended target. The failure to push ahead with the planned increase in the consumption levy is a sign of a weak government.”

Opinion Polls

Two years after Abe’s Liberal Democratic Party and coalition partner Komeito defeated the then-ruling Democratic Party of Japan in a landslide, opinion polls show Abe has retained relatively strong support, while backing for the opposition is split among six smaller parties.

The LDP will be the choice of 28 percent of voters for the 475-member lower house, compared with 10.3 percent for the DPJ, according to a Kyodo News poll published Nov. 29. The Japan Innovation party, which was created from the Restoration Party and the Unity Party in September, had 3.3 percent support.

The BOJ’s easing contrasts with the Federal Reserve’s decision in October to end a third round of quantitative easing because of an improved labor market.

‘Helicopter Money’

“The U.S. ended tapering and stopped dropping helicopter money, while Japan is forced to continue to prevent a fiscal default,” Fujimaki said, citing Milton Friedman’s example of executing monetary stimulus by dropping cash from helicopters. “It’s clear the dollar will strengthen,” said Fujimaki, who recommends holding assets denominated in the U.S. currency.

Standard & Poor’s said yesterday its view of Japan hasn’t changed since October, a day after a ratings cut by Moody’s from Aa3 to A1, the fifth highest investment grade. S&P rates Japan at AA-, equivalent to the Aa3 level at Moody’s before the reduction. Fitch Ratings has Japan at A+, the same as the new rating from Moody’s.

A tax increase may be an important measure, but it’s unclear if the benefits would have been as great as anticipated, said Takahira Ogawa, director of sovereign ratings at S&P in Singapore.

Fitch plans to complete a review of the nation’s ratings before the end of the year, Andrew Colquhoun, the company’s head of Asia-Pacific sovereigns said last month, saying that the delay in the tax move is a “significant development” for Japan’s credit rating profile.

‘Chain Reaction’

“The bond market is calm in the aftermath of Moody’s downgrade and a sudden surge in yields is unlikely because the BOJ has been serving as a pain killer,” Hideo Kumano, an economist at Dai-ichi Life Research Institute and former BOJ official, wrote in a note yesterday. “But we should be mindful of the possibility of additional downgrades in a chain reaction.”

Japan’s 10-year benchmark bonds yielded 0.45 percent, the lowest globally after Switzerland. The two-year yield fell below zero for the first time last week reducing borrowing cost for the government with more than 1 quadrillion yen in national debt.

Fujimaki joined the Tokyo office of Morgan Guarantee Trust Co., which merged into JPMorgan Chase & Co., in 1985 and later served as managing director and treasurer, helping to make it reach the most profitable foreign bank in Japan.

After correctly picking the 1990s rally in JGBs, he was hired by Soros Fund Management, once the world’s biggest hedge fund group, in 2000. He stayed less than a year, saying to Bloomberg News at the time that he failed to read the Japanese bond market correctly. He has been predicting an eventual default in Japan since at least 2009.

“The BOJ’s QE will cause bad inflation or hyper inflation,” Fujimaki said.

THE NITTY - GRITTY ABOUT THE EURCHF FLOOR

Due to the recent discussion about the EURCHF  peg, I  would like to share a few things about the currency  :

·         SNB is using a floor  for  a second time in its history. The first one was introduced on 01/10/1978  (DEM/CHF floor at  0.80 CHF)

·         In addition to  the first  floor , SNB had also  introduced administrative measures(e.g ban  of paying interest to foreign deposits)  to address the  strong currency 

·         The peg  lasted  3 years .  In 1981 the Central  bank  abandoned the peg to curb inflation. None the less  currency  never  broke the floor.

·         In  September  2012  the Swiss Central Bank introduced again the  floor  to 1.20 to  curb the  pressure on CHF due to  European crisis

·         SNB has repeatedly  stated  that will “defend this cap  with utmost determination and stands ready  to buy  unlimited amounts of foreign currency “

So what  can make the SNB to abandon the floor? The only  reason is  Inflation .  SNB will be forced  to abandon the floor in case inflation start rising. 

Are we there yet  ?  Not even by  a long shot as it  can be seen in the graph   below .