In a tribute to one of the great comediennes of modern times–and no I am not being RIDICULOUS–the FED meeting will result in an homage to the early cast of Saturday Night Live. On the “Weekend Update” segment, Gilda Radner would do her shtick with Jane Curtin and end with, “Jane, I tell you it’s always something.” This is what Chair Yellen will reveal tomorrow. In an effort to stall another rate rise the FOMC will cite several possible headwinds facing the U.S. and global economies. The U.S. DOLLAR will be a concern because in the Sara Eisen interview with Vice Chairman Stanley Fischer he revealed that the FED did consider the DOLLAR in its decision-making.
Over the weekend there was a new and improved G-20 communique, which was supposed to offer reassurance that the primary economic decision makers have things under control. It is disconcerting that so much time was spent discussing the global uncertainty posed by BREXIT for the global equity markets have deemed the British vote to Leave the EU as non-event (at least for now) and maybe even a positive for the Davos elite to adjust previous policy decisions. It appears that some G-20 members look forward to dealing with the U.K. on trade issues outside an EU establishment that is reticent to foster trade agreements because of German and French elections scheduled for 2017.
Tomorrow the ECB announces its next view on the European economy and the central bank’s unveiling of its efforts to keep DISRUPTING GLOBAL BOND MARKETS. Currently, the ECB is purchasing 80 billion euros a month in “quality” assets in order to meet its self-created mandate to bail out EU sovereign governments and the banking system. SINCE DRAGHI’S JULY 2012, “WHATEVER IT TAKES” speech, the ECB president has become the overseer of MONETARY and FISCAL POLICY. Yes, the unelected, unaccountable central bank chief has seized control over the European economy. The media and Brussels elite don’t notice as long as interest rates are repressed even lower and the current European remains in power. Wall Street applauds all things Mario as it sustains the global equities on a sea of liquidity. The ECB has successfully repressed yields on all sovereign debt because the globalization of finance ensures that all yields are relative as pension funds and insurance companies chase returns.
Indeed, the world doth have many piles of prairie grass to be LIT. After the NYSE closed for the weekend but while CME‘s electronic markets were still trading news broke about a COUP in Turkey. To readers of NOTES, this possibility was forecast in a post from October 15, 2015. The coup was not a surprise but the execution of the COUP was a comedy of errors (except for the deaths) as the leaders failed to prevent any communication from President Erdogan. In the world of social media the first action OUGHT to have been the jamming of all radar and wireless communication so that the overthrowers of the elected government would have a monopoly over all messages. It seems that George Friedman of Stratfor was the first to doubt the ability of the military conspirators and announced that the coup had failed.
As I ponder things in the 118 degree heat, it is time for some reflection and perspective:
a. The Bank of England performed beautifully today and took a breath before cutting rates further and/or increasing the BOE’s balance sheet. Now that Prime Minister MAY‘s cabinet is devoid of the idiot George Osborne, it behooved BOE Governor Carney to wait and see if fiscal policy would be the stimulative tool of choice and preserve the monetary policy for future use. I had advised my employers that Carney would be reticent to act because he is a cautious man and his recent plunge into the political realm in cahoots with George Osborne had sullied his reputation. It seems that Carney wants to remove himself from center stage and allow the new cabinet to have a say in just how to provide any stimulus in response to the dire forecasts from the BREXIT outcome.
Every once in a while I entertain the fantasy of being at the helm of the Federal Reserve. In a moment of megalomania I am proposing this solution to situation that the FED finds itself: The velocity of money is extremely low as zero interest rates have led to a massive buildup of overnight reserves at the FED. Money’s low velocity is compounded (pun intended) by the bloated balance sheet that the Fed has attained through its massive QE program. Certain voices are maintaining that the severe flattening of the yield curve is precluding domestic banks from making greater profits, which results in less lending activity. It is not only the low profits impeding bank lending but also the massive amount of high quality collateral controlled by the FED that diminishes financing activity from the shadow banking sector via the REPO market. IF THE FED WERE TO BEGIN SHRINKING ITS BALANCE SHEET BY SELLING TREASURIES OF A 10-YEAR OR LONGER DURATION, THE YIELD CURVE WOULD STEEPEN AND THE REPO MARKET WOULD SPRING TO LIFE AS MORE HIGH QUALITY COLLATERAL WOULD CIRCULATE IN THE MARKET.
Just some summary points as this year the summer doldrums will prove to be anything but:
The jobs report on Friday was the antithesis of May’s poor data, which was actually revised downward by 27,000 to a very meager 11,000 NFP gain for May. The June report brought an unexpected increase of 287,000 jobs, although the average hourly earning (AHE) showed a weak 0.1% gain. The market closes revealed a well known fact: ULTRA-LOW INTEREST RATES ARE THE KEY ELEMENT TO THE REACTION FUNCTION OF TRADERS AND INVESTORS.
Some quick hitters before getting to work on the implications of Friday’s employment report.
I am posting today’s story on the Santelli Exchange I taped today. Rick and I were back on the most important topic facing the world: THE ECB’s ROLE IN CREATING A SITUATION THAT MAKES GERMANY LIABLE FOR THE DEBT OF THE ENTIRE EUROPEAN UNION. The world is still abuzz about the BREXIT referendum and its implications for the U.K.. There’s also chatter about what it might mean for other EU nations contemplating STAYING OR GOING in terms of subjecting their citizens to the capriciousness of Eurocratic regulation. The question for me (and will continue to be): WHO GUARANTEES THE ECB, AND, OF COURSE, THE COROLLARY QUESTION, SHOULD ALL SOVEREIGN DEBT BE A ZERO WEIGHTED RISK ASSET CLASS?