Notes From Underground: The Day Is Upon Us … Be Patient and Don’t Act With “Water-Like Impetuosity”

Tread lightly into the throes of Fedspeak for first comes the FOMC statement a 1 p.m. CST followed by the last press conference of Chairman Bernanke’s term at 1:30 p.m. The markets are going to be volatile as confusion reigns in all asset classes. Today, the Treasury market was trying to reassert a steepening bias into the 5/30 yield curve as the FIVES were strong and the 30-YEAR YIELDS were rising. However, by day’s end the 5/30 retraced and closed unchanged on the day (if you trade the curve in futures terms the ratio is almost three FIVES to one THIRTY-year bond). Consensus has changed and the bias is for a tapering the question is: HOW LARGE? I have assumed a $20 billion tapering and I will stick with that “bold” conjecture. It is important to listen for any language of forward guidance on the unemployment threshold for if the Fed were to hint at lowering the 6.5% threshold, markets will reverse course, especially the S&Ps and DOW, which have spent the last few days in correction mode.

As I have maintained about the GOLD market, be patient and watch to see how the market closes in the 24-hour period after any announced tapering. Many people seem to think that any action to curtail Fed bond purchases will lead to a dramatic selloff in gold as investors rush to book year-end losses to offset gains in the equity markets. I am not sure that will happen because many commodity-based traders have sliced their gold positions and besides, not everyone has a December 31 year-end. Give the market time to digest a great deal of news and be prepared with a game plan for whichever course of action you wish to trade.

Also, watch the YIELD CURVES for interest rate traders and investors have the highest IQ in the game of money flows. I am inserting a chart (courtesy of Bloomberg) on the 5/30 curve structure so that readers can see the picture of old tops that have acted for support over the last few trading days. It appears that if the 5/30 curve drops below 225 basis points the market will push lower. That is not a specific point but a mere eyeballing of the chart configuration. But be patient for in an ALGO-driven trading environment nanosecond price action is an illusion, not water-like impetuosity for me.

U.S. 5/30 Yield Curve

***Currency wars were revived this week. First, Reserve Bank of Australia Governor Glenn Stevens raised the delicate issue of currency values in a speech last week when he cited $0.85 for his prefered level for the Aussie dollar. Stevens said, “… it’s probably more preferable … to support the economy via a weaker currency than with further rate cuts.” He made it known that an $0.85 Aussie was more advantageous than $0.95. The targeting of your currency is a NO-NO, according to the G-20. The second salvo for a currency war came in a Financial Times interview with BOJ Governor Kuroda in today’s paper. The interview, titled “Halfway There,” is a reference to the effort by PM Abe and Governor Kuroda to raise Japan out of deflation and onto a 2% inflationary growth path.

In using a policy of QQEQUANTITATIVE AND QUALITATIVE EASING–the BOJ hopes to raise inflation through three channels. First, massive amount of purchases of Japanese Government Bonds (JGBS). Second, the “portfolio  rebalancing effect, where domestic investors would shift from bonds to riskier types of assets. Third, the greatest effort to shift the expectations of Japanese conservative-oriented savers.

The interviewers asked Governor Kuroda if the exchange rate was a part of the portfolio rebalancing. Mr. Kuroda agrees that it is, adding that “initially, the rise in inflation reflected a depreciated currency” Mr. Kuroda is intent on bringing inflation to the economy so as to unleash the vast pool of cash that has been rewarded by falling prices and caused people to curtail expenditures as future prices were deemed to be lower. Kuroda wants to end the policy of households and firms being rewarded for accumulating piles of cash. He notes that the BOJ has other tools at its disposal but declined to announce whether the BANK plans to currently use them. These tools include negative interest rates on bank reserves, purchase of foreign assets, increasing government bond purchases, and, of course, precise forward guidance.

Governor Kuroda did note that the “purchase of foreign bonds is presumably to lower the exchange rate. That is the PREROGATIVE OF THE GOVERNMENT” (emphasis mine). Kuroda even borrowed Mario Draghi’s line in the interview–”BOJ will do ‘whatever it takes.’” The Aussies and Japanese have  destroyed the spirit of  the G-20 communiques. Imagine that. He has also provided ammunition for the members of the U.S. Congress to impose restrictions on the present negotiations of trade treaties with Europe and Asia … HMMM.

***NOW A BOLD PREDICTION FOR 2014 FROM NOTES FROM UNDERGROUND: GOLDMAN SACHS WILL ANNOUNCE THAT IT IS TAKING ITSELF PRIVATE AND BACK TO A PARTNERSHIP. As the fog clears on the minutiae of the Dodd-Frank morass, Goldman would be better off ridding itself of the mass regulation. GS has survived as the major prop-trading shop on Wall  Street and the nonsense of it being a bank holding company should be put to rest. It doesn’t need the capital and could actually return to its roots of being a very highly qualified fiduciary and advisor to governments and corporations and actually put its clients first. Because of its contacts and wealth of information it can have a separate arm as a hedge fund and not be subject to an entire alphabet of regulators. Besides, with the availability of cheap capital for qualified buyers, Blankfein could easily finance the firms capital needs in the bond markets. This is one of my early predictions for finance in 2014. Hey, what do I know but my thoughts about this are not an example of impetuousness. As the Sundance Kid said to Butch Cassidy: “Butch, you keep thinking, that’s what you are good at.” (H/t on the quote to RTR.)

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13 Responses to “Notes From Underground: The Day Is Upon Us … Be Patient and Don’t Act With “Water-Like Impetuosity””

  1. Johnny Dangereaux Says:

    Hiya Ira, will you be in the office Friday? I’d like to get 3 of the “Broken” books. Thank-you, Johnny

  2. yra Says:

    Johnny –yes I will -Thanks for thinking of me and I know you will enjoy the book .

  3. Arthur Says:

    good points. “Ultra/rich fear inflation” by John Authers http://www.ft.com/intl/cms/s/0/b2c7ca06-6664-11e3-8675-00144feabdc0.html#axzz2nnToLdkg

  4. yra Says:

    Arthur–yes,an interesting piece to say the least–John Authers has a good journalist sense as he gets to the guts of many stories as in his column he strives to understand capital flows in all its dimensions.Did a 10 minute segment with him on Europes CNBC closing bell two weeks back and it was a very positive experience.

  5. Arthur Says:

    Yes, it is a great pleasure to read your blog and his column weekly. Getting my MBA Global Macro & Geopolitics!

    Thanks!

  6. Shocked to Find Gambling Says:

    Yra- You said-

    It appears that if the 5/30 curve drops below 225 basis points the market will push lower.

    Suppose the yield curve flattens because the market thinks the economy will start to pick up sharply, but with reasonable inflation.

    This scenario would also flatten the yield curve, but probably rally the stock market.

  7. yra Says:

    Shocked –not necessarily if the forward guidance keeps the short endat zero–the markets will move to punish the long end as the fed is cornered by its own language which Stanley Fischer has warned about

  8. yra Says:

    And there you have it—the threshold was change in very obfuscatory language

  9. yra Says:

    IT IS EARLY –but watch the yield curves which have swung wildly

  10. Chicken Says:

    Tepid Tapering

  11. yra Says:

    Chicken–I agree totally but just be a little patient to let the smoke simmer a little—the Euro weakness at the end of the day may be a tell about the issues of Europe coming back into the mainstream

  12. Ali Tuna Says:

    Following 24 hours move of Gold , what is market telling to you Yra ?

  13. cagdastuna Says:

    Following first 24 hours of Gold move what is market telling to you Yra ?

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