The reference of 19 ways to leave your lover is a reference to Janet Yellen’s Labor Market Condition Index (LMCI), which is what the Fed chair noted as the most important “dashboard” for measuring SLACK in the labor market. To achieve a true measure of labor market slack it is important for the Fed to dig deep into the statistical data of the unemployment report giving the Fed latitude in its decision-making. Remember, the Fed has twice moved the parameters of the jobs data as the different thresholds established by the Fed were breached quicker than anticipated. First it was an unemployment rate of 7 percent and then moved again to 6.5 percent. The threshold was then moved lower again as slack and its impact on WAGE PRICES was deemed to be the best measure of the health of the jobs market. If the Fed’s focus is wages then the FOMC statement tomorrow should be unchanged as the recent data has continued to reflect that wage gains are stagnant.
After the newest moves by the wily fox Mario Draghi last Thursday, NOTES raised the issue of what the Swiss National Bank would do in response to the negative vibes emanating from the guardians of the EURO currency. The SNB has supported the EUR/CHF cross at a floor of 1.20 to “prevent” the Swiss economy from slipping into a deflationary spiral. The SNB has accumulated a massive foreign exchange portfolio as it has bought hundreds of billions of euros to ensure the floor holds on the. The massive buying of euros has been somewhat successful as 1.20 holds but the market still puts pressure on the Swiss as the cross is trading between 1.2050 and 1.2100. All that buying and the CROSS is a mere 0.8% off the floor.
Did he really say that about currencies and sovereignty? In an article in tomorrow’s Financial Times it is reported that Mark Carney said during a Q&A that a “… currency union between England and an independent Scotland would be ‘ incompatible with sovereignty.'” Carney said a currency union needed three elements for success. “These were the free movement of goods and services across different parts of the currency, a banking union underpinned by common institutions such as a central bank, and elements of shared fiscal arrangements.” Fanning the flames of criticism against the euro and Brussels, Carney added: “You only have to look across the continent to look at what happens if you don’t have those components in place. A currency union is incompatible with sovereignty.”
Well, NOTES FROM UNDERGROUND gets an A+ for analysis and an F or incomplete for EXECUTION. Caught off guard by Draghi’s timing, the market never provided a rally for the more cautious trader. The euro currency began its break 55 minutes before the official ECB rate announcement as Reuters ran a story revealing the governing board’s discussion of a supposed EU500 BILLION ABS program. A leak during the meeting should provide reason for the ECB to investigate its security breaches and find out who is making money from revealing important information ahead of the governing officials. It must be like Congress, where elected representatives are allowed to be insider traders.
The wires are burning with the possibility of the ECB moving forward with a quantitative easing announcement. I would give it a 1% chance, or, in options pricing terms, A CABINET BID. It is too early for President Draghi to impose a QE plan for next month the European authority reveals its asset quality review (AQR), a stress test by any other name. The ECB would be wasting its ammunition until it sees how the market reacts to new information on the health of European banks and thus the European financial system. If the results are as dismal as I believe, Draghi will want to initiate his asset-backed security program so as to create a market mechanism for relieving the banks of their problem loans. The market maker for these ABS instruments will be the ECB as they will be the only buyers willing to pay inflated prices for NONperforming loans. High prices will need to be paid to keep the banks solvent for if the haircuts on the troubled loans is too large the banks will collapse.
Let us continue where last night’s blog ended. This week’s move by the French President Hollande to reshuffle the government’s cabinet should be perceived as a way for France to negotiate for a depreciation in the EURO and an end to the German-imposed conditions of growth through austerity. Prime Minister Valls cast out previous Economic Minister Arnaud Montebourg because his continuous attacks on the Germans’ push for austerity wasn’t appreciated by Chancellor Merkel. Montebourg is a beloved leader of the Socialist Party and has been a close confidant of President Hollande. The change in the cabinet can be disastrous for Hollande’s socialist standing so we must examine Hollande’s political maneuvering as representative of something bigger.
It has been refreshing to sit and watch the world spin without the pressure to react to the daily dose of instability. Europe is devolving into the mess that I have been blogging about for almost five years. Two weeks ago I appeared on Rick Santelli’s show and made the comment that anybody who puts money on deposit in a European bank is a MORON. Why would you place money in an institution that pays ZERO when you have great risk of losing a large part of your savings? Capitalism is all about reward/risk and taking great risk for minimal reward is the true measure of stupidity. THE PROBLEM FOR EUROPE IS ITS BANKING SYSTEM. The high level of unemployment has led to high levels of non-performing loans, which has clogged the credit creating system of European banks. In Europe the credit system is heavily dependent on banks rather than corporate bond markets. BANKS ARE NOT LENDING BECAUSE SOVEREIGN BONDS ARE SAFER, especially with the Asset Quality Review (AQR) results that are being released in mid-October.
Today’s trade was supposedly a risk on/risk off as all of July’s news that failed to impact the market became relevant today. Argentina, Gaza, Ukraine, Portuguese banks … all these issues became reasons for the 2 percent selloff in global equity markets. The problem with the pundits in search of a correlative rationale failed to find the traditional correlations. The SPOOS sold off forty points and the bonds actually closed lower. The YEN, which has been the safe harbor for global investors, remained unchanged for most of the trading session. GOLD, the ultimate haven, lost $14 and closed miserably for the month. Tomorrow’s GOLD action will be critical as we closed under the 200-day moving average. A CLOSE under 1276.50 after the unemployment report will be the end of my bullish outlook on GOLD until some other technicals provide support.
It seems that the Fed’s FOMC statement was an effort to have it all: “LABOR MARKET CONDITIONS IMPROVED, WITH THE UNEMPLOYMENT RATE DECLINING FURTHER. HOWEVER, A RANGE OF LABOR MARKET INDICATORS SUGGESTS THAT THERE REMAINS SIGNIFICANT UNDERUTILIZATION OF LABOR RESOURCES.” This is Janet Yellen coming clean. She is a labor economist who will ensure that the FED will err on the side of labor and wage gains. The battle cry from the Fed is loud and clear: No RATE RAISES BEFORE WAGE INCREASES.