Last Sunday I warned in a blog post that the Ukraine situation would heat up after the Olympics as Vladimir Putin would not wish to draw attention away from his beloved event as he did during the Beijing Olympics by maneuvering against Georgia. Right on cue the Russians moved against the Crimea in an effort to protect its geographic and strategic interests. The Crimea has been extremely important to the Russians for 300 years as the tsars desired a warm-water port to allow Russian commerce and imperial designs to proceed even when the Northern waters were frozen during the winter months. The Russians will defend their interests just like any other world power and it is in their immediate backyard. The Europeans and U.S. can threaten sanctions and other such nonsense but as Churchill noted long ago, “I cannot forecast to you the action of Russia. It is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is Russian national interest.” (October 1939)
I am reissuing four pieces from 2009 and 2010 about the Ukraine. The importance of Ukraine to the EU and Russia should not be diminished and therefore what we have seen over the weekend is just another scene in a very long drama. The most positive news has been that Victor Yanukovich seems to have abdicated his position as President and that previous leader Yulia Tymoshenko has been freed from prison. But, caution should be the watch word as the Winter Olympics come to an end and Russian President Putin will turn from being a congenial host to a grand-master of the political chess game.
I am going to take a well-deserved hiatus but I wanted to list some “quick hitters” on the issues facing the markets in the coming weeks. The Yellen testimony has been digested and regurgitated (ad nauseam) and the bottom line is Chairwoman Yellen is singing from the same hymnal as her predecessor. The stock market investors/traders are comfortable with a known known and as readers of NOTES are well aware markets appreciate as much certainty as possible. BUT I WARN EQUITY BULLS WHO BLINDLY FOLLOW THE FED LIQUIDITY MODEL: Janet Yellen is a labor economist of Keynesian predilections.
The talking heads of financial visual media tried to create a circus around the new Fed Chair Yellen’s first official Congressional testimony. Yellen proved a worthy animal trainer and backed critics and supporters to their corners as she delivered very measured and COGENT responses to her inquisitors. The media was hoping for “red meat” but the Fed chair served up a vegetarian casserole full of nutritional value but nothing for the perpetrators of pabulum to sensationalize. It seems as though Yellen watched tape of Mario Draghi for she knew which Congressional posers needed long, drawn out answers so as devour their allowed five minutes of time. Well done Madam Chairman. This testimony of the Fed Chair, as mandated by Congress, has become about as relevant as the G-7 photo-op. If Congress has questions, put them in writing and establish a record of correspondence and thus a trail of responsibility to satisfy the dual mandate. It was reported that the House Republicans on the Finance Committee was to going to have a second hearing post Yellen’s testimony in which four invited guests would provide a rebuttal of the policy put forth by Yellen.
Yes, the U.S. unemployment data grabbed the headlines on Friday as the non farm payroll headline number was lower than consensus again. More importantly, the revision to the very weak December payrolls of 74,000 jobs was only revised upwards by 1,000. Average hourly earnings and hours worked were also weak and after the initial drop in the stock indices, equity markets spent the entire day rallying. It seems weak data powers the equity markets’ understanding of the Fed’s forward guidance. Tapering is not tightening and the Fed will keep rates low for a very long time and let the 6.5% unemployment threshold be a mere “candle in the wind.” The Canadian data was better than expected but did substantiate Thursday’s strength in the IVEY PMI. The strong global equity markets were also supported by diminished fears from the emerging markets as investors have lost the sense of urgency to flee all EMs.
The ECB and The Bank of England delivered their interest rate announcements, and, as I expected on Tuesday, the result was absolutely no change to current policy. The FED had paved the way for maintaining the present course and the Europeans were certainly not willing to risk upsetting the markets. What surprised me was the fact that the EURO CURRENCY rallied strongly as President Draghi presided over a press conference in which he put on an act of stonewalling and obfuscation that made Alan Greenspan look like a freshman debater. Wow, Mr. Draghi can evade the best of questions and believe me I listened to the entire press conference and the questions were of a very high caliber. Mr. Draghi did invoke a new strategy and that was lengthening his answers so no one could remember what he had really said in the beginning. The bottom line is this:
“There’s something happening here
But what it is ain’t exactly clear
There’s a man with a gun over there
Telling me I got to beware
I think it’s time we stop
First, bravo to the Bernanke Fed for staying the course and learning from its September mistake: Don’t mislead the markets with a sudden change of direction. It appears that the Fed will provide investors with enough “forward guidance” if they wish to alter the market’s perceptions. FOMC members had plenty of time to dissuade traders if the recent slew of tepid data was going to steer Bernanke and Company away from another cut in QE purchases. The FED erred on the side of consistency rather than swerving to avoid the skidding emerging markets. Again, a FED pause would have further roiled a very nervous global financial market.