Notes From Underground: Is It Possible To Win BEN STEIN’S Money? (BEN Bernanke + Jeremy STEIN)

The unemployment data from the U.S. and Canada were very much on target. After last month’s robust employment data, there was a small decrease in Canadian jobs and nothing outstanding in terms of manufacturing hiring so nothing to see north of the border. The U.S. nonfarm payrolls were slightly higher than expected but the average hourly earnings, which were more powerful, rose 0.4% (or 10 cents an hour). Increased wages are needed to sustain consumer demand so this was a positive factor in the data. Also, the April and May NFPs were both revised higher, making the markets believe that a September tapering of asset purchases is on the schedule. The U.S. BOND MARKETS were sold aggressively, sending yields on the long-end of the curve soaring.

The positive data from the U.S. also caused a reversal of Friday’s rally in the European bond markets. German bunds were sold in sympathy with U.S. Treasuries even though factory orders in Germany were much weaker than expected. The Europeans want to separate from any synergy with the U.S. but as yesterday’s market action revealed, the correlation-seeking algos will make this more difficult than mere rhetoric. The U.S. DOLLAR performed as expected as strong data gave an impetus to U.S. assets versus the languishing economic data from Europe. The German DAX (equity index) closed lower on the week even with the new rhetoric from ECB President Draghi. Friday’s DAX settlement in the September futures was below the LOW made on Thursday. Germany has been the locomotive of Europe but if the engine is weakening the European situation will deteriorate … quickly.

I have long maintained that Mario Draghi has been the FOX in the tale of central bankers, for while Bernanke and Mervyn King (BOE) have been aggressive in quantitative easing, President Draghi has bought a sense of calm with mere words: “WE WILL DO EVERYTHING TO PRESERVE THE EU,” and, if necessary, will invoke QE with our Outright Monetary Transactions (OMT), which not one EURO was ever provided. At the June ECB press conference, Mr. Draghi proclaimed the ECB to be the most conservative of all the central banks. If a change in the world’s perceptions is upon us, the ECB will become an aggressive participant in providing of massive amounts of LIQUIDITY, even as the FED tapers. It is time to pay close attention to the GOLD/EURO cross as an indicator of global finance becoming concerned about the European economy and the credibility of the ECB.

I have continuously opined that GOLD is not an INFLATIONARY BAROMETER but rather a store of value in a time when investors fear the onset of a deflationary spiral and how a central bank will REACT. The Japanese did not move to liquefy and debase so the YEN and BOJ maintained credibility. The initial fears in the world were that the U.S. Treasury and FED would not be able to right the economy through their UNCONVENTIONAL POLICIES, but for the last 18 months the fear of spiralling deflation and possible currency debasement has subsided in the U.S. Japan has entered the fray with their recent efforts at quantitative easing, though now it appears to be the Europeans’ problem, hence President Draghi’s turn at the July 4 media inquisition.

The movement in U.S. rates in response to the removal of “tapering” language has not only caused instability in European and emerging debt markets, but is sending the U.S. yield curve to a quick steepening. The short-end of the curve, the TWO YEAR, is held in place by continued FED rhetoric that “tapering is not tightening” and if QE ends it doesn’t mean that the FED will raise the FUNDS RATE. The problem in the massive steepening that has taken place is that it leads to higher mortgage rates, which will dampen housing demand as fewer potential buyers will pay higher home prices and higher interest rates. Some pundits are suggesting that potential buyers take out ADJUSTABLE RATE MORTGAGES but in a new regulatory environment ARMS are going to be a much more difficult proposal. Credit standards are elevated and the ability for the big WALL STREET BANKS to package the garbage into new types of ASSET-BACKED SECURITIES (ABS) is not going to be easy to sell to an investment crowd still in pain from the previous credit crisis.

So while the “BEN STEIN” efforts at curtailing some of the massive credit risks created while the FED was gunning the monetary engine have recently been successful. “BEN STEIN” are cautious that the speed of risk removal is too fast and may upset a still fragile domestic and global economy. If I am correct, then the 5/30s chart may provide some opportunity to make money playing farther out on the U.S. yield curve. If the rise of ARMs in the mortgage market doesn’t take hold and the FED worries about the housing market, it will be the MBS and the long-end of the Treasury curve that is the recipient of FED designs. It’s too early to tell, but as always do the technicals and see if there is development. The 30-YEAR BOND has risen dramatically as many of the ETFs and other leveraged vehicles have dumped assets as prices have dropped on the notion of a FED tapering. But the question arises: Is there not some REAL YIELD IN A BOND YIELDING 3.8% in a 1.6% inflation environment?

***China PMI is to be manipulated AGAIN as the Chinese leadership is unhappy with the skew from attempting to input a huge amount of data from so many sources. As my favorite sweatshirt says: “When in doubt, manipulate the data.” For years I have written that the data releases from China are unreliable, but my premise has been that if Google is not allowed freedom of operation then I can never rely on the information that is released.

***To finish up this holiday weekend, in which we celebrate the freedom that the July 4 anniversary represents, I want to close with a letter to the FT editors that I wish I had written:
      “Citizens–Stand Up To Special Interests and the Punditariat,” from Mr.Harry L. Langer of  New York, New York
      “Sir, The US is suffering from an epidemic of academentia, caused by an over-educated commentariat and punditariat sensitive to special interests, fearful of a loss of political access and public exposure, and motivated by ego, speaker fees and book profits. They espouse conventional wisdom and group think and smugly proclaim the obvious a revelation. They have no solutions, and are afflicted with mental myopia, immune to new ideas, devoid of creativity and are glorified and given credibility by a craven media and publishing sector. This is particularly true in, but not limited to economics, politics and foreign affairs. The antidote is an informed, discerning demanding and activist citizenry. This is the most effective means to cure a constipated Congress and defeat special interests. In a democracy the electorate has the power and choice and deserves what it gets.”
For me, the purpose of writing NOTES FROM UNDERGROUND is to serve as a forum and informational point to help break the chains of consensus and be able to profit. Here’s looking forward to an interesting next six months.

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10 Responses to “Notes From Underground: Is It Possible To Win BEN STEIN’S Money? (BEN Bernanke + Jeremy STEIN)”

  1. kevinwaspi Says:

    Yra,
    Again you’ve hit the nail on the head; squarely! Like you, I wish I had written the letter you quoted. Our local newspaper today carries an excellent piece by syndicated columnist Bruce Kauffmann titled, “The Sovereignty of The People: Jefferson’s Genius”, a must read.
    Hopefully there are still enough people in the U.S. who believe in thinking for themselves and want independence. You do a patriot’s job of bringing the horses to the trough in Notes, now let’s hope they drink!

    “Governments are instituted among men, deriving their just powers from the consent of the governed.” –Thomas Jefferson: Declaration of Independence, 1776. ME 1:29, Papers 1:42
    Kevin

  2. rjlafferty Says:

    Yra,

    Thanks for a great synopsis of a busy 96 hours — most of which I spent looking up into the bottom of a Coors Light can and yelling at a little white ball.

    I’m seeing tonight that Japan is moving to restart a small percentage of its nuclear reactors (10 of the 48 offline). Do you still think this will measurably impact yen and brent (or is this a C$ play) or are stronger factors dominating those markets?

    Thanks.

  3. yra harris Says:

    RJ–checking with my source and does not see it in actuality –the turning on the nuclear reactors is using it in campaign discussions and the regulaotr will look at applications for an early restart according to the new rules—nothing approved yet

  4. Ronald Ferrill Says:

    Lots of ground covered here.
    I know that after the Bernanke response in markets and the rise in the 10 year, I immediately started combing the bond market for high quality under par, YTM and YTW of at least 3.5%. Trying hard to hold my trigger for the “whites of their eyes”, but boy, I want to shoot! Yes, there is real yield in 2 points over inflation.
    Also, as I looked more seriously into GOLD, it came to mind that GOLD doesn’t have the ability for compounding. A factor in my investment thinking always.

  5. yra harris Says:

    Ron –good points and it takes patience real patience

  6. Notes From Underground: Is It Possible To Win B... Says:

    […] I have continuously opined that GOLD is not an INFLATIONARY BAROMETER but rather a store of value in a time when investors fear the onset of a deflationary spiral and how a central bank willREACT. The Japanese did not move to liquefy and debase so theYEN and BOJ maintained credibility. The initial fears in the world were that the U.S. Treasury and FED would not be able to right the economy through their UNCONVENTIONAL POLICIES, but for the last 18 months the fear of spiralling deflation and possible currency debasement has subsided in the U.S. Japan has entered the fray with their recent efforts at quantitative easing, though now it appears to be the Europeans’ problem, hence President Draghi’s turn at the July 4 media inquisition. The movement in U.S. rates in response to the removal of “tapering” language has not only caused instability in European and emerging debt markets, but is sending the U.S. yield curve to a quick steepening. The short-end of the curve, the TWO YEAR, is held in place by continued FED rhetoric that “tapering is not tightening” and if QE ends it doesn’t mean that the FED will raise the FUNDS RATE. The problem in the massive steepening that has taken place is that it leads to higher mortgage rates, which will dampen housing demand as fewer potential buyers will pay higher home prices and higher interest rates. Some pundits are suggesting that potential buyers take out ADJUSTABLE RATE MORTGAGESbut in a new regulatory environment ARMS are going to be a much more difficult proposal. Credit standards are elevated and the ability for the big WALL STREET BANKS to package the garbage into new types of ASSET-BACKED SECURITIES (ABS) is not going to be easy to sell to an investment crowd still in pain from the previous credit crisis. …  […]

  7. Mario Says:

    Fixed Income world is a douser. The damage has been done even without tapering. Meaning a complacent bond market (em, credit etc) investor base has a taste for what a bear market feels like and eventually we will move to even higher yields. And it does appear to be on the horizon, so outflows may slow, but they will probably be persistent. We are going to have to see how yields respond to a market that is seeing bond market outflows, less foreign CB accumulation of risk free assets (if they do it will be shortend), a diminished Fed footprint and improving economic data, all at the same time. Great read Yra, around the entire spectrum of the macro world.

  8. yra harris Says:

    Mario–I am asking you to head a project to have readers pick the best of Notes From Underground from the last 31/2 years–if you would like to head this up—it will help get us thru the summer

  9. Mario Says:

    Afternoon all,
    Sift through and grab some great information pertaining toward the Fixed income world that we have found to be instrumental as it begins to unfold. I know Yra found a few topics that heavily influenced this quandry we have found ourselves in. Each day i will look for a determining topic that has its macro influence coming to fruition from posts ago. Anyone who would like to be involved with this historcial nugget of knowledge and refresh those forgotten cosmos, contact me at mario@vfund.com. We can put together a great benefit to steering through this summer as many of us have already had this pointed out eons ago. Stay one step ahead by reading between those black letters! Gold has been a heated discussion for some time and I know the Underground Notes have spent some time in that area. Below is a great read from march 2012 about the gold run and the currency debasement we have all seen.
    http://yragharris.com/2012/03/13/bull/

  10. Chicken Says:

    Create great fear, then take the other side of the trade.

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