OKAY, so the FOMC minutes were released and all the pundits who never trade were kibbitzing about the THIRD coming of QE. Upon several reviews of the MINUTES, I AM OF A FAR DIFFERENT OPINION. AND, UNLIKE THE PUNDITS OF THE GREAT WASTELAND, MY MONEY TALKS WHILE THEIR BULLSHIT WALKS. Yes, it is indeed frustrating to hear opinions morph into facts. As I reread the FOMC MINUTES I fail to see the certainty of a FED ACTION AT THE NEXT FOMC MEETING AND I OPINE THAT BERNANKE WILL NOT OFFER ANY GREAT INSIGHTS AT THE JACKSON HOLE SYMPOSIUM. AGAIN, ANY FED ACTION WOULD BE A REWARD TO THE CONGRESSIONAL DERELICTS WHO CONTINUALLY FAIL TO DO THEIR DUTY AND CONSTRUCT A RATIONAL FISCAL POLICY.
The FOMC MINUTES had many references to financial problems in Europe, which is unusual for the myopic FOMC and their U.S.-based chauvinism, so EUROPE does take on an added importance. And what does the market do after the MINUTES ARE RELEASED? WHY, BUY EUROS, OF COURSE. So the reason for FED concern leads traders to buy the currency that is the basis of FED ANGST. “And they saw the possibilities of an intensification of strains in the Euro area and a sharper-than-anticipated U.S. fiscal consolidation as significant downside risks to the economic outlook.” HMMM, certainly reason to buy EUROS and to also Congress off the hook for the “fiscal cliff” crisis. In another concern voiced by an FOMC member the minutes say, “One participant posited that the sharp decline in net worth and reduced credit availability in recent years not only weighed on aggregate demand, but also reduced aggregate supply by hampering new business formation and product innovation….”
In my opinion this FOMC member needs to read some of Bernanke’s text books as the participant needs to understand the concept of INTERTEMPORAL DISLOCATION. When the FED lowers rates to spur demand in a balance sheet recession, businesses don’t invest in capital or labor but the future remains uncertain as so much demand is BROUGHT FORWARD FROM THE FUTURE–think about the impact of CASH FOR CLUNKERS. Initial demand for autos increased but for the next three years demand tumbled. As the future remains uncertain firms are leery of capital investment and will err on the side of maintaining the present amount of capital formation.
This is one of the biggest drags on the European economy as firms are nervous about the installation of austerity programs and thus ADVERSE FEEDBACK LOOPS. As the concept of PUSHING ON A STRING reveals, A CENTRAL BANK CAN RAISE RATES TO STOP A BUSINESSMAN FROM BORROWING FOR INVESTMENT BUT IT CANNOT LOWER RATES ENOUGH IF THE FIRMS OWNER IS FEARFUL ABOUT ECONOMIC GROWTH (Joseph Schumpeter).
***As further proof of the EU’s dramatic slowdown, last night the Japanese trade data was released and Japan’s trade surplus turned into a deficit as exports to EUROPE and CHINA SLOWED. Japanese exports to the EU dropped 25% month over month as the rising rates in the EU peripheries and the enactment of austerity budgets is beginning to impact Asia.The uncertainty in the Chinese economy, partly a result of the European malaise, is having an impact on an economy overly dependent on exports. The result of the negative news on Japanese exports was dwarfed by the FOMC MINUTES, RESULTING IN A YEN RALLY OF MORE THAN 1%. That is what the Japanese need a stronger YEN. Anybody home at the MOF or the BOJ as Japanese domiciled corporations are being ravaged and hollowed out by the ÜBER YEN.
***Adding to further concern about Europe was the Reserve Bank of Australia (RBA) release of its minutes in which Governor Stevens highlighted the RBA’s views on the EU. “In Europe, timely indicators suggested that economic activity had contracted in the June quarter with declines in both consumption and investment. Labour markets remain very weak, particularly in crisis economies….” The RBA also notes, “while the competitiveness of the crisis economies had been improving, members noted that further significant economic adjustment seemed necessary and the challenge ahead for the EURO area remained substantial.” So, it seems that the G-20 is truly concerned about EUROLAND. Thus, it seems time to dust off the EURO’s resistance areas and look for places to sell the EURO. The last thing the DRAGHI ECB NEEDS IS A STRENGTHENING CURRENCY. Mario, ABOUT THOSE BOND CAPS…
***Today, Bank of Canada Governor Mark Carney delivered a strong speech to a union convention of the CANADIAN AUTO WORKERS. Imagine Chairman Bernanke facing a UAW convention and raising the issue of improving exports. “Given our dependence on the U.S. market, our exports are still below their pre-recession peak … Some blame this on the persistent strength of the CANADIAN DOLLAR. While there is some truth in that, it is not the most important reason. Over the past decade, our poor export performance has been explained two-thirds by the market structure and one-third by competitiveness. Of the latter, about two -thirds is the CURRENCY while the rest is labor costs and productivity. So, net, our strong currency explains only about 20% of our poor export performance.”
This is such a straight forward speech to what could be a hostile group that Mark Carney gets our vote for the CENTRAL BANKER OF THE YEAR–just a discussion about how the economy needs to improve its productivity. A wonderful clear and concise statement on a day ladened with questionable analysis that passed for FACT. AND STILL THE MARKET SOLD THE CANADIAN DOLLAR … another dose of 2+2=5.