The markets initial reaction to the FOMC statement was perplexing as the financial media reported the FED to be hawkish for there was nothing explicit about a potential QE3 program. Readers of this BLOG were well aware that the consensus was for no change from the FED as it would have been difficult to announce any new program with the G-20 meeting this weekend in Cannes. The BRICs have already accused the U.S. of causing havoc in world currency markets by utilizing its monetary policy as a “stealth devaluation” of the U.S. DOLLAR. It seemed though that the FOMC statement was DOVISH because the previous three dissenters all voted with the majority–there was a lone no vote and that came from Chicago FED President Charles Evans.
According to Mr. Evans, the FED needs to be more aggressive in providing liquidity as it has failed to meet the growth/employment mandate. Mr. Evans has been very consistent in his views for in his recent speeches he has pushed for more robust monetary stimulus. Dallas FED President Richard Fisher, the media’s favorite symbolic monetary hawk, has voted against Bernanke in previous meetings but has been dovish in his speeches as he notes that UNEMPLOYMENT is the FED‘s main concern. This FED is primed for a new round of stimulus. If Friday’s unemployment data is weak the FED will be ready to roll out some new program.
***We return to EUROPE because that is the basis of market volatility. Yesterday was more of the issue of the GREEK referendum, with Brussels announcing that there would be no more funds for Greece until the referendum is decided, with Sarkozy DEMANDING a first week of December date. Chancellor Merkel and President Sarkozy are under the false assumption that they are in control of Greeks and other peripherals because the German and “French” pocket books are the support mechanism. The French and German leaders are DELUSIONAL! Every time that the ECB and EFSF are called into action, the position of the Spanish and Italians is enhanced. Sarkozy has revealed that the issue is the solvency of FRENCH AND OTHER EUROPEAN BANKS, not the sovereigns.
Berlusconi is now considered the “bad boy” of Europe as he also changes the Italian position regularly. He recently embarrassed Sarkozy by not removing Bini-Smaghi from the ECB executive board as he had previously promised. Berlusconi knows full well that an Italian or Spanish insolvency will shake the foundations of Europe. Therefore, President Berlusconi can stiffen his position and play to his domestic Italian electorate. Papandreou and Berlusconi are practicing the art of brinkmanship for it plays well at home. This is not a PRISONER’S DILEMMA,but what I would call a HOSTAGE DILEMMA.
It is akin to that great scene in Blazing Saddles, when Cleavon Little puts his gun to his own head and threatens to shoot himself if his demands aren’t met. Greece, Italy and the others are learning that the fiscal rectitude of Northern Europe is held hostage to the profligate PIIGS for the DEBT is owned by the financially prudent while the profligate want to maintain their ways and party on. If the creditors cut off the sovereign deadbeats, the global economy stands to collapse. Geithner is begging for cooperation but the more he pleads the higher the ante for the PIIGS to agree. Welcome to CANNES.
***This morning the ECB will announce its interest rate intentions. Most pundits believe Draghi will hold off easing at his first meeting. I was previously in this camp, but yesterday the IIF (Institute of International Finance) was clamoring for a rate cut from the European bank. Charles Dallara, the managing director of the IIF felt it was necessary for the ECB to loosen the reins on rates. The IIF has been very angry at the EUROCRATS for changing the rules on the July 21 agreement and raising the haircuts on Greek sovereign debt.
There may be a quid pro quo, cutting rates to soothe the anger of the world’s large financial institutions. If you think this has merit, buy the DECEMBER 2011 EUROBOR. Even though it is already pricing in a small cut, it may well be worth a look. If the ECB were to cut, the EURO would initially sell off but it may turn and rally as it is perceived to mean that Europe and the G-20 have actually crafted a significant deal … just food for thought.