Notes From Underground: CNBC’s Santelli Exchange — Foreign Exchange Outlook

July 20, 2014

 

yra7-18-2014Click on image to watch Rick and I discuss the euro currency and ECB balance sheet.

Notes From Underground: The Alfred E. Neuman Equity Markets, “What, Me Worry?”

July 20, 2014

Alfred E. Neuman for President

Alfred E. Neuman, the beloved character of Mad Magazine, was famous for his deadpan look while espousing the philosophy, “What, Me Worry?”

While the world has certainly entered the madness zone, the world’s equity markets remain in bull mode, floating on a sea of central-bank provided liquidity. Russian support and arming of “rebel” groups results in the downing of a commercial airliner … no problem. An Israeli invasion of Gaza to thwart the nihilistic behavior of Hamas, and the markets shrug and offer up a bland response of, “whatever.”

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Notes From Underground: On Yellen’s Testimony

July 17, 2014

First, as I have been critical of Chair Yellen’s communication efforts prior to this weeks Congressional testimony, I will give the Chairwoman an A+ for her effort this week. She was very forthcoming in her Senate appearance on Tuesday, and, more importantly, she fended off the idiots in the House of Representatives with clarity and the patience of a saint. The problem with the House is too many ex-prosecuting attorney’s who all try to get Yellen in a gotcha moment, but the Fed Chief was not falling for the trap of providing sound bites for the elections back in the home district. The Senate questions were of a substantial nature while the House was fluff of either adulation or criticism.

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Notes From Underground: Yellen Heads To The Senate Banking Committee

July 14, 2014

Today on CNBC Rick Santelli brought up an issue that NOTES FROM UNDERGROUND has been discussing since Fed Chair Yellen spoke at a Chicago Fed Conference when she placed the names of three long-term unemployed people (as if the Chairwoman’s speech was a State of The Union Address). It is wrong for a Fed Chair to bring moral philosophy to the conduct of MONETARY POLICY IN A FIAT CURRENCY WORLD. The Fed’s role is to preserve the DOLLAR as a store of value even with the DUAL MANDATE. The United States bears an exorbitant privilege with the dollar as the world’s reserve currency, with all commodities priced in dollars. The exorbitant privilege comes with an exorbitant responsibility and that is the maintenance of the DOLLAR AS A RELIABLE STORE OF VALUE.

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Notes From Underground: Santelli Exchange–Fischer’s Fed View

July 13, 2014

Yra on Santelli ExchangeClick on the image to watch Rick and I discuss the battle between Janet Yellen and the BIS, as well as Fischer’s July 10 remarks.

Notes From Underground: Sunday’s World Cup Final = Creditor/Debtor Bowl?

July 10, 2014

There’s a little levity during a very stressful week of trading. Germany meeting Argentina in the World Cup final is symbolic of the battles being waged by the world’s central bankers. Jeremy Stein and the BIS view the threat of financial stability a potential concern of Janet Yellen and Mario Draghi. The world’s financial markets will be watching to see what style of play on the pitch prevails: The aggressive Argentinian speed or the more AUSTERE and supreme defensive style of Germany. In the spirit of global macro humor I ask these questions:

  1. Will presiding referee Thomas Griesa issue a RED CARD to the entire Argentinian team for defaulting on its debt?
  2. If the Argentinians get control of the ball will someone from Elliott Associates come and grab it as Griesa deems it an asset of the debtors?
  3. If  Argentina prevails, will the trophy be confiscated and given to the intransigent creditors for sale on E-Bay?
  4. Will Griesa suffer the slings and arrows of outrageous fortune as he is deemed by FIFA to be a biased American judiciary with no genuine knowledge of the international beautiful game of debtor/creditor?

***The question to which we keep returning: ARE THE WORLD’S CENTRAL BANKS THREATENING THEIR CREDIBILITY? A corollary ¬†question: DOES THE FED UNDERSTAND ITS OWN FALLIBILITY? As yesterday’s FOMC minutes revealed, confusion reigns within the FED as to the strength of the real economy, especially in ways to measure the OUTPUT GAP of the employment data. How much slack exists in the labor pool to prevent a dramatic rise in wages is of paramount importance for the Fed’s “forward guidance” (and signaling to markets future FED intentions). The FED speaks with great confidence in its projections but if past performance is a guide investors should treat all Fed projections with skepticism. It was the highly regarded Ben Bernanke who maintained well into late 2007 that the housing slowdown was well contained and should pose no problems for the U.S.economy. Yet, the impact of the U.S. credit crisis was severe enough to effect banks and bondholders across the globe. The bottom line is that the FED is fraught with failings and for investors to treat all Fed releases as pearls of perfection should proceed with caution.

In an Financial Times piece published yesterday, Axel Merk wrote the following:
“Ms. Yellen told us that policy under her leadership is not rules based. As such, market participants have to rely on the Fed’s ad hoc assessment. And that is very much like reading tea leaves, as the Fed is looking at backward-looking indicators such as the most recent unemployment report. Forward-looking indicators, such as the yield curve, are less reliable as the Fed itself has actively managed gauges. That, in turn, forces market participants to try to read Ms. Yellen’s mind. Her statements make it clear that her focus is on keeping rates low to help promote job growth until inflation readings get enough over the targeted 2 percent level to warrant concern in her mind.”
So, again, the price of the FED‘s certainty can be found in a weak DOLLAR and ultimately strong precious metals. If Yellen and Bernanke admit to not understanding GOLD, I advise measuring your own fallibility and putting that into your projections.
***And now back to Europe. Readers of Notes From Underground have known that the European financial markets have never fallen off the radar as the rally in peripheral debt and certain European banks were deemed to be a fool’s paradise. Today’s news about Portuguese bank, Banco Espirito Santo, missed a bond payment sent chills through the market. Banks have never healed but have been recipients of the ECB‘s liquidity efforts. However, non-performing loans have continued to plague the balance sheets of many Spanish, Italian, and Portuguese financial institutions. (Yep, the PIIGS have returned to the headlines.) More importantly, if the ECB and the BIS continue to disagree about interest rates and financial stability, the BIS can inflict pain on Europe’s banks by pushing for sovereign debt to some type of risk-weighting, requiring the need for more bank capital. Banco Espirito Santo have only survived through the European debt crisis by loading up on Portuguese sovereign bonds. (That is, borrowing from the ECB at very low rates, buying Portuguese debt and earning the differential, all risk free.) If the BIS keeps pushing back against the ECB and the FED, more bank problems will arise.
***However, in the eyes of the French and Mario Draghi there was a positive result from the Banco Espirito Santo: the weakening of the EURO against most currencies. The move was not dramatic but did provide some respite from recent euro strength. THE KEY TO THE EURO MAY BE IN THE EURO/SWEDE CURRENCY CROSS. On July 3 the Riksbank slashed interest rates in an effort to keep the KRONER weak against the EURO (in my opinion). IF THE EUR/STOKIE TAKES OUT THE LOW OF THE CROSS FROM JULY 3 IT WILL BE A CRITICAL STATEMENT ABOUT INCREASING PROBLEMS IN THE EUROPEAN FINANCIAL SYSTEM. The range for the EUR/STOK on the day in question was: a high of 9.3580; a low of 9.1540 with a close of 9.2856. Today the close was 9.2340, which is lower, but the July 3 low of 9.1540 should become the critical number.

Notes From Underground: Who Knows What Lurks In the Mind Of the BOE, the Shadow?

July 9, 2014

Tomorrow the Bank of England’s Monetary Policy Committee meets to decide interest rates. Governor Mark Carney has recently confused markets by saying that interest rates would probably rise sooner than forecast. Then Mr. Carney changed directions by following the FOMC and suggesting that the slack in the labor market would allow the BOE to stay the present course and keep interest rates at present levels for an extended period. Overnight rates are currently at 0.50% and with the British pound strengthening against most currencies the BOE is expected to maintain the status quo.

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Notes From Underground: The Bank That Kicked the Hornets Nest

July 7, 2014

The release of Thursday’s U.S. employment data synchronized with ADP’s private sector report of 281,000 jobs created. The Department of Labor had a gain of 288,000, including the strongest growth in government jobs since the onset of the great financial crisis. Being that July 3rd had very limited volume because of the holiday weekend, it was difficult to determine the genuine nature of the shortened trading activity. Thursday did see a rally in the SPOOs, a strengthening in the U.S. dollar and a downside correction in the precious metals. The most difficult market was the interest rate and yield curve. The immediate reaction was a sizable selloff in all interest rate tenors but by day’s end the LONG END recovered and the 2/10 was a bit flatter. Yesterday saw a correction in the SPOOS as some analysts now believe the FED will bring the projected hike in interest rates forward to a rise in the second or third quarter of 2015.

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Notes From Underground: The Unemployment Report Table Is Set, Will You Be On The Menu?

July 2, 2014

Today’s release of the ADP report caused the market to react in highly predictable fashion. ADP data predicts a nonfarm payroll in the high 200,000 and as to be expected the BOND FUTURES were sold on the positive outlook, resulting in a STEEPENING in the 2/10 yield curve, a rally in the U.S. DOLLAR and leaving yesterday’s SPOOS rally intact. The only non-correlative trade was the precious metals and copper as both sets of ELEMENTS rallied, defying the implications of potential higher interest rates. Tomorrow will be important in seeing how the market reacts to the jobs data. BE PATIENT. Here’s why:

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Notes From Underground: BIS Warns About “Euphoric” Markets

July 1, 2014

The big news story from the weekend has been the warning from the central bankers’ banker, the Bank For International Settlements (BIS), that financial markets have become “… detached from the reality of a lingering post-crisis malaise, as it called for governments to ditch policies that risk stoking unsustainable asset booms.” The BIS annual report warns about leaving ultra-low interest rates for too long a period. The Financial Times article reported what I consider to be the most significant piece of the report: “Particularly for countries in the late stages of financial booms, the trade-off is now between the risk of bringing FORWARD THE DOWNWARD LEG OF THE CYCLE AND THAT OF SUFFERING A BIGGER BUST LATER ON” (emphasis mine).

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