It seems that 108 years is enough time to pass to relive history. For those who are not sports fans, Merkle’s Boner is a famous mistake made by New York player Fred Merkel, who didn’t touch second base and was called out erasing the “fact” that the New York Giants had beaten the Chicago Cubs. The major GAFFE led to the Cubs beating the Giants and the CUBS moving to the World Series where they defeated the Detroit Tigers for their last World Series championship only 108 years ago.
My appearance with Rick Santelli on CNBC picked up on last night’s blog post. We discussed our concerns about the 7-3 vote in which the Fed Governors bested the Presidents. The FOMC has proven to be horrendous forecasters as Larry Summers suggested in his Washington Post op-ed in which he called out Yellen for her speech at Jackson Hole. Comparing Yellen’s forecast to Bernanke’s horrendous outlook on the housing crisis containment in 2007 was a tremendous insult. It seems that the Magnificent Seven have circled the wagons in defense against the ubiquitous criticism being leveled at the world’s central banks from fellow academics, traders, and pension and insurance companies. There was an interesting headline by Bloomberg that summarized Yellen’s press conference: “Yellen: Rich, Deep, Serious Intellectual Debate Today.” The intellectuals prevailed within the walls of the world’s most important debating society. The outcomes from central bank policy will make the fourth quarter a land of great trading opportunity. Do not be short volatility on a middle-term basis. The investment world is sitting on the tinder of multiple prairie fires. Which spark will light the tinder?
The vote was the key to the FOMC statement. Three regional presidents voted to raise rates for various reasons but at least the votes reflected their speeches. The Magnificent 7 voted to maintain rates at the current levels and wait for more time for labor market conditions to tighten as wage growth accelerates. (I TELL YOU JANET IT IS ALWAYS SOMETHING.) So the governors, plus new dove James Bullard, held firm against the outlying presidents. There’s no inner court role for Mester, George or Rosengren. My problem is that Stanley Fischer and William Dudley, both vocal proponents of raising rates, voted with Chair Yellen. Make no mistake about it, THIS IS JANET YELLEN’S FED.
The Wizard of Oz provides so many appropriate metaphors for dealing with global central bank policy. The failure of the wisdom of those who meet behind the “curtain” enthrall the members of the elite media who genuflect on the altar of access. Provide the necessary backdrop of equations and the media believes everything. It reinforces the sentiment of the Greenspan era: “If you think you understood what I said, I must have misspoken.” The idea of an “all-knowing Fed” is beginning to lose its luster as markets begin to understand that FED policy is not rocket science. There is no predictable outcome for the global experiment of negative interest rates or zero interest rates. Even the growth of supersized central bank sheets is causing doubts among the blind followers of free money forever.
On the Santelli Exchange, me and Rick discussed the very weak ISM non-manufacturing and its impact on the FOMC. The surprise weakness sent PRECIOUS METALS soaring, the DOLLAR lower, BONDS AND EUROPEAN SOVEREIGNS HIGHER and EQUITY MARKETS moderately higher. The FED is under the microscope from so many analysts but the surprise of the day was the OP-ED piece by Professor Larry Summers in the Washington Post. Summers put an academic gloss on the erudite review of Jackson Hole but this sentiment is key: “My second reason for disappointment in Jackson Hole was that Fed Chair Janet Yellen, while very thoughtful and analytic, was too complacent to conclude that even if average interest rates remain lower than in the past, I believe that monetary policy will, under most conditions, be able to respond effectively. THIS STATEMENT MAY RANK WITH FORMER FED CHAIRMAN BEN BERNANKE’S UNFORTUNATE OBSERVATION THAT SUBPRIME PROBLEMS WOULD BE EASILY CONTAINED,” [emphasis mine]. This is a harsh assessment from a fellow academic, but more importantly it is a stinging criticism of the FED’s forecasting history.
As we bid farewell to the dog days of summer, here are some issues that will set the agenda for the month ahead:
1. Friday’s employment data made the picture murkier for the FOMC meeting later this month. The nonfarm payrolls were on the weak side, and, as Art Cashin correctly pointed out on CNBC, the bigger issue was a drop in the hours of the work week, which when measured in terms of jobs gained/loss resulted in a loss of 300,000 jobs. The FED jaw flappers keep orally pushing for a rate hike on September 21 but this jobs report clouds the issue.
The talking heads report ad nauseam that several Fed members believe a rate hike possible but as I wrote last week, if the fed funds rate is not raised the critical component of the FOMC release will be the outcome of the vote. If Stanley Fischer doesn’t vote for a RATE HIKE then HE SHOULD RESIGN FROM THE FOMC. It is that simple for if Chair Yellen prevails in achieving another 9-1 vote then it is without question Yellen’s FOMC and all other ivory tower mouthpieces should remain silent. The Federal Reserve Board is under mounting criticism due the inconsistency of its members’ public pronouncements. The FED‘s credibility is being called into question, a potentially disastrous situation in a FIAT CURRENCY SYSTEM.
2. The G-20 meeting presented great selfies and photo-ops but little else. THIS MEETING REFLECTED THE STRAINS IN THE GLOBAL ORDER WHICH HAVE BEEN “PAPERED OVER” BY THE CENTRAL BANKS. Japan set the tone of the meeting by releasing a paper to the G-20 warning the world and especially Europe about the negative fallout from an acrimonious end to the BREXIT negotiations. Japanese corporations have massive investments in British capital projects and if British exports are to be penalized then Japan threatened to remove production and jobs from the U.K. and other European centers. I THINK THE JAPANESE WANTED TO SEND A MESSAGE TO ALL THE PARTIES IN THE BREXIT DISCUSSION, BUT MORE IMPORTANTLY, THIS WAS JAPANESE OFFICIALS RETALIATING FOR BEING SINGLED OUT AS A CURRENCY MANIPULATOR AT THE PREVIOUS G-20 MEETING. Japan prevented the Chinese from making them the focal point … yet again.
Before the release of the G-20 Communique, the U.S. and China held a bi-lateral meeting and one of the main issues discussed between Presidents Obama and XI was foreign currency movements. A fact sheet released after the meeting said, “China and U.S. Agree to Refrain From Competitive Currency Devaluations.” It may be a major political victory for the Chinese if the U.S. Treasury was deemed to be a serial currency manipulator in a similar vein of the PBOC. And this would be a serious blow to U.S. prestige. The actual language of the final communique was generic and sanitized: “We affirm our previous exchange rate commitments, including that we will refrain from competitive devaluations and we will not target our exchange rates for competitive purposes.” This is nonsense of the first order for as many critics of the Fed and ECB have argued over the previous six years: QE POLICY is a domestic monetary program with a weakened currency as a desired outcome. The G-20 reference is mere political posturing for the domestic constituency.
3. The Reserve Bank of Australia and the ECB have scheduled meetings this week. Tonight at 11:30 CDT the RBA will announce its interest rate intentions. The consensus is for no change from its current 1.5% overnight cash rate. The Aussie dollar is very weak against the Kiwi dollar, its main trading partner, so I’m in agreement with consensus. The important point is that it’s Governor Stevens’s last meeting and what he says about the Chinese economy should be of interest. THURSDAY will be an important day as Mario Draghi will hold a press conference following the ECB’s meeting. President Draghi has been very quiet of late and has allowed his underlings to speak about policy. Draghi didn’t even attend the Jackson Hole Conference. The European economy is sputtering. Italy is facing a November referendum. And, more importantly, German Chancellor Merkel’s CDU party suffered a miserable election result on Sunday with the anti-Euro AfD party garnering the largest increase in support.
The media paints the AfD success as a response to an anti-immigrant agenda. There may be an element of fact in that but the German middle class is raising its voice against the FINANCIAL REPRESSION foisted upon German savers as a product of ECB policies. If President Draghi is threatened by German domestic politics look for an increase in the ECB QE program to 90/100 billion euros a month from 80 billion in an effort to build the ECB balance sheet, weakening the euro and simultaneously pushing borrowing costs lower. Draghi is a man in a hurry as the political winds turn against the ECB. The problem for Draghi is that the massive QE programs promoted by Bernanke and the BOJ have failed to have the desired effects. Bloated balance sheets for the sake of bailing out debt-stressed nations provide political fodder for the anti-euro political tide rising across the EU. Mario Draghi has grabbed unlimited power for the ECB, BUT FOR HOW LONG? Yes, our work has just begun.
When Janet Yellen delivered her speech on Friday morning the markets reacted to the dovish overtones via buying of SPOOS, GOLD, BONDS and selling the U.S. dollar. The initial action was less muted as the algo headline readers first though Chairwoman’s words mildly HAWKISH, but as key words were measured in context the sense was Yellen was being dovish in not leaning toward a September rate increase. Yellen did give us a significant barometer of data measurement. It seems that 190,000 increase over a three-month moving average is the FED‘s BOGEY. This Friday’s estimate is 180,000, which now puts more pressure on its importance because of September’s FOMC meeting. As usual, Yellen said,”… the economic outlook is uncertain, and so MONETARY POLICY IS NOT ON A PRESET COURSE,” (emphasis mine).
Janet Yellen and company are discussing the wrong issue. A FED FUNDS rate hike has already taken place due to the increase in LIBOR rates, which has led to a pricing of the December eurodollar futures contract, currently trading at 99.08–an effective six month yield of 92 BASIS POINTS. This due to the Oct. 14 regulatory compliance deadline for money market funds. In order to ensure there’s enough liquidity to protect against unknown outflows, institutional prime funds are shortening the maturities of their commercial paper, CD holdings, pushing up the CP/CD rates and LIBOR with it. Some prime funds have converted to government-only to circumvent the impending regulations, which has created more demand for U.S. Treasuries. (According to the SEC’s July money market report, govt funds had inflows of $77 billion while prime funds saw outflows of $41 billion.) As a result, the TED spread has widened 15 BASIS POINTS during the past two months. The September eurodollar/fed fund futures spread is trading at 53 basis points. WHAT THE FED HAS TO DO IS BEGIN SHRINKING ITS BALANCE SHEET BY 100 BILLION ASSETS A MONTH. Why?
It’s tough to enjoy the final days of summer when the FED can’t just relax their wind pipes. The continued contradictions emanating from those who sit in the same meetings is jeopardizing the Fed’s credibility … AGAIN. Last Monday, San Francisco Fed President John Williams published an economic letter in which he posed the concept of either raising the inflation targets, or the Fed ought to target a NOMINAL GDP level. This was perceived to be an extremely DOVISH view as it would keep the FED on HOLD far longer than the market currently predicts. The problem was that Williams had voiced a HAWKISH view just two weeks earlier. The quick about-face makes me wonder if the Fed’s logo should be the Roman god Janus.