Notes From Underground: The Even-More Complex Map of Currencies and Politics

March 29, 2015

On Friday afternoon Chair Janet Yellen delivered a speech at a conference sponsored by the San Francisco Fed, titled “Normalizing Monetary  Policy: Prospects and Perspectives.” Many analysts will delve into the speech to find a possible nugget of “forward guidance” in the predisposition of Chair Yellen’s desire to raise rates. After a second read and reviewing several pages of analysis, I am left with the same outlook of President Harry Truman: Please bring me a one-armed economist. The speech is filled with a back and forth on the desire to raise rates to a level of “NORMALIZTION” but with the headwinds facing the U.S. and global economies caution is to be maintained. The headwinds prevailing in the U.S. and acting as a drag on economic growth are:

  1. Tighter underwriting standards;
  2. Continued household balance sheet reduction;
  3. Contractionary fiscal policy at local, state and federal levels;
  4. Lack of capex for lack of robust demand; and
  5. Recent appreciation of the dollar is likely to weigh on U.S. exports.

Chair Yellen opines that if the FOMC waits too long it could result in higher than targeted inflation levels. The Fed Chair cites the recent experiences of Japan and Sweden as a reason to be cautious “… in removing accommodation until the Committee is more confident that aggregate demand will continue to expand in line with its expectations.” Also, with “… an already large balance sheet. For example, the FOMC might be concerned about potential costs and risks associated with further asset purchases.” It seems it is better to err on the side of what Fed President Dudley has referred to as the economy running “hot,” which is inflation being sustained above the 2 percent level.

In a post-Yellen comment, Rick Santelli noted that during the brief Q&A session the Fed Chair said unequivocally, “Cash is not a very convenient store of value.” Santelli said this is the bogeyman of deflation and Gillian Tett picks up the argument in the weekend Financial Times with a piece, “How Deflation Gave Lower prices A Bad Name.” Readers of Notes from Underground have known that I refer to Ben Bernanke as a ’37er: An economist grounded in the belief that the early moves by the FED and the U.S. Treasury to prematurely tighten fiscal and monetary policy in 1937 led to a stifling of incipient growth and a renewed recession. “Cash is not a very convenient store of value” certainly signals that the Yellen Fed will keep rates as low as possible in order not to abort economic growth.

It has been my argument that the reason GOLD maintains its long-term strength is because of the fear of deflation and the policies employed by central banks to curb the possible threat of falling prices. In a continual effort to combat DEFLATION the world is awash in reserves, which presently support global equity markets. (It appears as if stocks are presently a better store of value than gold.) But as Tett wrote in her piece, falling prices are not always the BOGEYMAN of capitalism. Deflation is only a grave concern when an economy has accumulated for too much debt and then the fear of asset deflation brings about the asset liquidation of the 1930s and all the societal pain.

I believe the Bernanke Fed was correct in employing the first round of QE for it forestalled a massive round of asset liquidation in a very fragile financial environment. It is the continued use of QE that has created potential problems for the FED. Yes, I know as Senator Schumer proclaimed, “You are the only game in town.” I guess after reading the Yellen speech it appears that the Fed will remain data dependent but, more importantly, an aggressive easing of fiscal policy might be the real impetus for the Fed to raise rates. The ’49ers play in San Francisco while the ’37ers  dominate the Washington monetary scene.

***Global Politics — The news from the Middle East last week sent momentary scares into oil, precious metals and stock markets. The military response by the Saudis and a possible Sunni coalition of armed forces to recent events in Yemen was seen as a precursor of a new flash point in the already tense ME. By Friday, the oil markets sold off and the precious metals were in retreat as the conflict in Yemen was seen to be contained. IN MY OPINION THIS MOVE BY THE SAUDIS IS NOT TO BE MINIMIZED. WHY? If you look at a map of Yemen and its relationship to Saudi Arabia, and, of course Iraq, you will notice that both countries border the House of Saud. The Saudi family controls something greater than oil reserves. It controls the Islamic Holy Sites of Mecca and Medina.

The desire by Isis to rebuild the Caliphate necessitates the need to control the pivotal centers of the Muslim religion. While Isis is Sunni  the rebels in Yemen are a sect of SHIA and it is their Iranian support that causes the Saudis and other Arab states to militarily act to counter the perceived threat to the Saudi homeland. I have long believed that Mecca and Medina are the desired targets of any group or nation desiring to control the center of Islam. Those believing that Yemen is only about the control of Mandab Strait or Bab el Mandeb are fooling themselves. Yes, a choke point of oil transport is important. More than 3 million barrels of oil daily flow through the strait as crude moves to the Red Sea and out to the Mediterranean by way of the Suez canal. Yet there are also important elements in play in the struggle between Sunni and Shia.

In Friday’s FT, Richard Haass, President of the Council on Foreign Relations, wrote: “There are other reasons to predict limits to what the Saudis can be expected to do in Yemen. They lack much in the way of capable ground forces. Saudi arabia also has to worry about the home front. It is only a matter of time before it faces direct challenge from groups such as the Islamic State of Iraq and the Levant who will see ousting the government that controls the two holiest cities of Islam as essential to their ambitions.” If you believe the world is getting easier to decipher, think again. You need more than an MBA to know which way money will flow. The world is caught in the imbalances of 2+2=5.

***NOTE: I will be on with Mr. Santelli tomorrow morning at 9:40am Chicago time. I don’t know the topic but as my readers know, we’ll be prepared to go many places.

Notes From Underground: The Fed Came, Saw and Failed to Conquer Its Fear

March 19, 2015

The results of the FOMC meeting: Ray Dalio–1, Janet Yellen–0 (h/t KM). It seems that the FED is fearful of upsetting the Dalio apple cart by raising rates and possibly tipping off a sell off in global assets. As I wrote on Tuesday, the walk back of taking the “patient” off the respirator would result in a DOLLAR selloff as long dollar positions were hopeful of an unequivocal position statement from the Fed on a near-term interest rate increase. Notes From Underground believed the FOMC statement would remove patient from the release and then Yellen would defang the hawks by being cautious about the strong dollar and continuing concern over the lack of wage growth in an economy with improving employment metrics.

Read the rest of this entry »

Notes From Underground: Fed Loses Its Patience While I Regain My Voice

March 17, 2015

Never has so much money been riding on ONE WORD from a monetary authority. The issue isn’t the idea of FED PATIENCE in regards to raising rates for if the FED increases the effective rate to 37 basis points from 12 basis points IT IS MEANINGLESS. The issue for the FED is the huge pile of bank reserves sitting at the central bank to the tune of $2.7 TRILLION (and let’s not forget the FED‘s $4.5 TRILLION balance sheet). If the economy begins to heat up and banks begin to circulate those RESERVES, the FED will have a velocity of money problem as the ECONOMY MAY BE AT SOME LEVEL OF FULL EMPLOYMENT. It’s not an interest rate problem for the FED but a RESERVE PROBLEM.

Read the rest of this entry »

Notes From Underground: ECB QE–Whose Currency Is It? (CNBC)

March 10, 2015

Yra & Rick, March 10, 2015Click on the image to watch Rick and me discuss why ECB QE is broken. (“You can’t set policy for 19 countries because they’re all in different places.”)

Notes From Underground: IF … In a World Of Great Uncertainty

February 23, 2015

Yra:

originally posted on august 15,2012

Originally posted on Notes From Underground:

The travails of the financial markets continue even as the EURO ELITE believe that their holiday time is sacrosanct. Greece is in the headlines as financial pundits with time to fill conjecture about how long it is before the lifeline to the Greeks is cut and its economy and society set adrift outside the “safe” harbor of the EUROZONE.

View original 1,333 more words

Notes From Underground: Will the Dollar Make It Into the FOMC Statement?

February 23, 2015

Originally posted on Notes From Underground:

The FED is on the record as being patient as it tries to achieve its dual mandates of full employment and an inflation rate of 2 percent. In the December 16-17 FOMC release, it said the “… Committee expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.” While the FOMC statement made no direct mention of the DOLLAR’S STRENGTH, the release of the MINUTES revealed that the dollar had been discussed in reference to inflation. The minutes said: “Participants generally anticipated that inflation was likely to decline further in the near term,reflecting the reduction in oil prices and the effects of the rise in the foreign exchange value of the dollar on import prices.”

View original 617 more words

Notes From Underground: Before I Depart for Much-Needed Rest…

February 8, 2015

I’m taking a two-week hiatus as it is time to contemplate the massive volatility we have experienced during the past three months. The rise in vol was no surprise as the world financial and political landscape has been rife with uncertainty for several years. Central bank actions have lulled financial markets into complacency, though turbulence underlies the surface of calm. In the past three weeks we have experienced the Swiss National Bank removing its EUR/CHF PEG and sending currency markets into a whirl of uncertainty. (Plus, the generation of huge losses on long-held short Swiss franc positions.) More importantly, the SNB decision wreaked havoc on European banks that had financed loans in Swiss francs because of the ultra-low interest rates.

Read the rest of this entry »

Notes From Underground: Is Tomorrow’s Number a Meaningless Statement?

February 5, 2015

Yes, except if the nonfarm payroll numbers comes in above 300,000 jobs created and/or average hourly earnings rise above 0.4%, reversing last month’s -0.2 %. Consensus is for payrolls to grow by 235,000 but that is in line with the average of the last six months so it will have to be a strong number to give some substance to the more hawkish voices on the FOMC Board. More importantly for Chair Yellen will be the wage growth for if wages lag job growth the Fed will be reticent to raise rates, especially in the face of a strong dollar or the euphemism of” international developments.” In my humble opinion, global financial conditions in the light of European instability will play a larger role in the Fed’s decision to raise rates, which is why I maintain it will take a large number to give voice to those Fed voters wishing to raise rates.

Read the rest of this entry »

Notes From Underground: An Open Letter To the Davos Ruling Elites

February 4, 2015

We  are in a period of great political uncertainty. The Greek election is a wake-up call for all the established elites and their sycophants who drink high-priced alcohol to celebrate every new IPO and record high made in global equity indices. The recent victory of Syriza is a call to arms by citizens that have grown tired of broken promises and inept leadership. Fringe parties achieving electoral success in a very short period of time is a critical sign of electorates moving away from the establishment as record-high unemployment has continued for several years and the continued pain of austerity has rendered the European middle class a group without hope. The leaders of Syriza have promised the Greek people that they would throw off the burden of massive debt payments while being enslaved to a policy of FISCAL CONTRACTION.

Read the rest of this entry »

Notes From Underground: Is Jim Bullard The Fed PIMP? Domique Strauss-Kahn Wants To Know

February 3, 2015

Today, the trial of former IMF Director Dominique  Strauss-Kahn [DSK] began in Paris. The former IMF director is charged with “aggravated pimping in an organized group.” Well, if DSK is on trial for aggravated pimping, it seems that St.Louis Fed President James Bullard OUGHT to be indicted on a similar charge.

Read the rest of this entry »


Follow

Get every new post delivered to your Inbox.

Join 1,754 other followers