Note From Underground: Mr. Bernanke Meets the House Budgeteers

Sound bites from the left. Sound bites to the right; here I am, stuck in the middle with you (STEALERS WHEEL). The House Budget Committee was in full political regalia as posturing  for the home folks and November’s election was in full force. Most of the questions are redundant or ridiculous and in some cases, both. An exception was Committee Chairman Paul Ryan, who asked Mr.Bernanke if the FED‘s policies had corrupted the BOND markets that they stopped sending a credible signal. It has been a consistent theme of NOTES that the BOND market is broken as an indicator of inflation expectations because the FED‘s large scale asset program has created an artificial support to LONG-TERM BOND PRICES.

Bernanke parried Ryan’s assault on the FED‘s actions by citing the BOND prices of the GIIPS as when the market loses confidence then indeed the PRICES OF DEBT WILL SUFFER. Therefore the FED‘s buying program is acceptable to the market because rates continue to remain very low reflecting the market’s confidence in the FED.

WELL CHAIRMAN BERNANKE, OTHER MARKETS THAT ARE FREE FROM FED REPRESSION TELL A DIFFERENT STORY: GOLD IS BACK ON THE RISE AND THE DOLLAR IS VERY WEAK VERSUS OTHER CURRENCIES, WHICH THE MARKET DEEMS TO BE FAR MORE RESPONSIBLE IN THEIR FINANCIAL POLICIES. A MAN HEARS WHAT HE WANTS TO HEAR AND DISREGARDS THE REST (Simon and Garfunkel).

Further, Bernanke criticized the Europeans for moving to strict austerity budgets while their economies are so fragile. Forced austerity when the economy is weak destroys near-term budget projections. IN MY UNDERSTANDING OF CHAIRMAN BERNANKE’S WORDS, THE FED WILL BE FORCED TO BE EASIER FOR LONGER BECAUSE OF EUROPE’S ILL-CONCEIVED AUSTERITY PROGRAMS. Bernanke acknowledged that the FED‘s policies were difficult to manage in times of such turmoil, in which Chairman Ryan alluded to that it was similar “TO DIRECTING A CRUISE MISSILE THROUGH GOAL POSTS.” (That will probably be the sound bite that makes the mindless news.)

In a side discussion, Steve Liesman also added his views in opposition to Rick Santelli, that the continued low BOND RATES WERE PROOF POSITIVE THAT THE FED POLICY WAS THE CORRECT POLICY. Again, this argument is deeply flawed because it fails to take into account the markets need for SYSTEMIC QUALITY COLLATERAL. CREDIT USERS ARE FORCED TO COMPETE WITH THE FED’S QE BUYING AS THEY ARE SEARCHING FOR THE COLLATERAL TO KEEP THE REPO MARKET GOING, ESPECIALLY AS SO MUCH SOVEREIGN PAPER HAS BEEN LAID LOW BECAUSE OF THE PROBLEMS IN EUROPE. To say that long-TERM DEBT MARKETS REFLECT THE FED’S SUCCESS IS SUPERFICIAL AT BEST.

***Unemployment tomorrow. I don’t think this is important after the FOMC statement last week but we prepare nonetheless. First the Canadians release their data and the market is looking for 23,000 gain in jobs with a 7.5% rate. The last two releases were tepid but December did see a significant increase in manufacturing jobs, which we will look to see if the automotive sector in Ontario is in fact gaining traction. If Canadian manufacturing is increasing it will be a positive for the U.S. market as it would confirm recent U.S. manufacturing gains.

Ninety minutes later we will read the U.S. data, which is looking for 150,000 nonfarm payroll gain, and, more importantly, the average hours worked which gained last month and is expected to hold at 34.4 hours. The average hourly earnings is expected to rise 0.2% and if it is higher, it will be seen as a positive for consumer demand. The tricky data will be the UNEMPLOYMENT RATE–expected at 8.5%. If nonfarm payrolls increase but the rate rises it will be interpreted as a positive as it will mean that more people are renetering the labor force. Again, with the FED on hold post-FOMC it will take a very large number to truly impact the markets, something on the oreder of a 250,000 NFP increase will push the rates on the long end higher.

***A quick look on Merkel in China. The German Chancellor is trying to persuade the Chinese to become a major participant in the EFSF and the coming ESM. The Chinese have promised to ante up money before and failed to deliver so good luck Frau Merkel. The Chancellor also said she would challenge the Chinese on human rights and its policies toward Iran and Syria. Advice to Merkel: WHEN YOU ARE BEGGING FOR ALMS IT IS NOT SMART TO ADMONISH YOUR TARGET DONOR ON ITS BEHAVIOR. SO CHANCELLOR MERKEL, JUST CONTINUE BEGGING AND STOP THE MORAL POSTURING.

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6 Responses to “Note From Underground: Mr. Bernanke Meets the House Budgeteers”

  1. rohrintl Says:

    RIght on Yra… the most relevant comments all day were about how quickly the interest rates can shift once the disconnect hits home… i.e. comes back to roost from the periphery of Europe. We have seen historically how yields can quickly surge several percent once the light bulb goes finally clicks on.

    Any comments on how the markets are indicative of policy success is merely a sign of folks who’ve failed to read Soros on ‘reflexivity’.

    Masterful summary. Look forward to more.
    -Alan

  2. MattW Says:

    Wholeheartedly agreed about the outlook for Bernanke implying continued Fed
    easing based on troubles in the EU.  And although I philosophically ‘lean’
    on the idea that markets are much better left to their own devices to
    perform proper price discovery, I still humbly wonder if that mechanism is
    broken or rates markets are actually ‘getting it.’ The collateral idea makes sense and there is a hugely
    important player in the bond markets, the Fed (taking up 90+% of recent
    issuance in some tenors), but are low rates truly a reflection of that
    participant or really just a proper discounting of the liquidity trap and
    deleveraging that is necessary to eliminate an unsustainable overhang of
    private debt?  Looking at the price action I’d tend to believe the latter as
    it seems during these last three years fed easing has been overwhelmed by
    market forces of fear and greed driving yields. As seen by rising yields
    soon after QE’s initiated (as participants out ‘risk’) and falling yields as
    markets swooned on fears of the continued global deleveraging effects.
    Somewhat irrelevant to ponder, but from a trading point of view I’d find it
    hard to believe we’re on the verge of a surge in rates anytime in the near
    future. We all know the story, private and some public sector delevering,
    velocity of money virtually nonexistent, and base money not leading to any
    increase in money supply. Now if there were a major fiscal response…
    With only 30y real yields now positive, seems even that may be fleeting as
    managers seek to match long term liabilities with any type of real yield
    available.  
    Although as Alan mentioned I could be simply exercising my fallible
    interpretation of the markets and one of many adding to the reflexive
    feedback loop.

    As spoken to so well here before, we’re left to sort out where the
    opportunities are to trade, and one of the only things that stands out to me is the
    recently plummeting realized volatility in some markets (oil), that is
    slowly feeding into implied vols (near 20 realized against mutli decade
    average of ~35 implied). Based on the idea that oil prices right now seem to
    be looking at a truly binary outcome, is there an opportunity here to
    capitalize on lower implied vol likely won’t last?

    Also, with record Euro net shorts and all the focus on ECB balance sheet
    expansion, I think the market may be missing something here. Some recent
    work done by a team at Citi showed a much a stronger correlation to tail
    risk expectations than CB balance sheet changes makes one want to get long
    euro on anticipation of short term stabilization. Jordan seems intent on
    holding the SNB line and maybe presents us with a nice entry in eurchf,
    especially considering recently weak pmi and export data, can’t imagine
    there’s much patience to watch 1.20 trade.

    Long post but lots of great coverage here recently and looking forward to the always valuable insights.

  3. yra Says:

    MattW–a very intelligent and thought out post–again makes this effort well worth it with posts like this.The question we need to ask after today’s release is if this is a game changer as we finally see if the investors on the sideline are really forced to move into action.If SO THE DOLLAR COULD RALLY AS THE U.S. IS DEEMED TO BE A POSITIVE VENUE,ESPECIALLY IN RELATION TO THE EUROPEAN CESSPOOL.AS RATES IN EUROPE MOVE LOWER DUE TO LTRO THEN THE EURO WILL BE THE FUNDING VEHICLE FOR GLOBAL INVESTORS.ALSO ,WE NEED TO WATCH THE METALS TO SEE IF PLATINUM AND SILVER TAKE THE LEAD FROM GOLD AS PEOPLE MOVE OUT OF THE ULTIMATE SFAE HAVEN.THESE ARE SOME INDICATORS THAT NEED WATCHING

  4. MattW Says:

    Thanks very much for the insight and a great call about any upside surprise near 250k driving long end rates. Seems the initial reaction was in alignment with the capital flows into USD as you just mentioned. Will be watching these metrics closely…

  5. meg Says:

    what do you think about NFP today?

  6. yra Says:

    Meg,tonight’s blog comments on it as my response to MattW on Friday monrning.I also do not agree with the spin from the ney sayers about the 1.2 million drop outs–not that simple to analyze that

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