The news out of Europe today was not favorable for Greece as it was reported in the German paper DIE WELT that German Finance Minister Wolfgang Schäuble suggested Greece would need to restructure. Schäuble’s comments led the cost of interest rate on the DEBT of the peripherals to rise. By day’s end, Greek 2-year rates climbed to 16.8 percent. Portugal rose 25 basis points to 8.87 percent and Ireland increased 25 basis points to 8.20 percent. Spain’s bonds were also priced higher as rates increased 10 basis points. All in all, not a very splendid day for the European debt-stressed nations, but yet again the DOLLAR could not gain ground against the EURO as an initial DOLLAR rally faded quickly. It appears that some central banks are recalibrating reserves as even a DOLLAR rally seems to be so short-lived. The EURO has performed well even though it has the cloud of uncertainty overhanging its economic and political situation.

This weekend may see the European bailout plan be upended if the TRUE FINNS win an outright victory in Finland. If the anti-EURO PARTY were to win it would be a statement that the FINNISH CITIZENRY want no part of national bailouts by the ECB or any other mechanism. The reverberations in Berlin will be felt and Frau Merkel will be in an even more difficult political position as the anti-Europe forces within Germany will be louder and certainly stronger. If the TRUE FINNS win and the DOLLAR still fails to rally, it will be a signal that other factors are at work and the DOLLAR is suffering from some structural defects beyond the immediate radar screen.

As an example of the incomprehensibility of the rating agencies, Moritz Kraemer, head of S&P’s European debt-evaluation group stated: “Greece’s rating clearly signals that the risk of an eventual restructuring has risen over the last year or two. However, if you look at historical default rates at a BB rating level,the base case is still they would not restructure.” It never ceases to amaze me how the ratings agencies stay in business. If I could question Mr. Kraemer I would ask how much Greek debt S&P is buying for its investors. Again, a great many people talking and not many listening to what the market has to say.

Which brings me to the tonight’s headline. There is so much chatter coming from FED officials about transitory inflation and exit strategies and today we had PLOSSER speaking on the need for inflation targets. FED officials are busy telling the market what to think and do but the collective wisdom of the market  is telling the key policy makers that it is very worried about the effectiveness of the FED. Goldman’s two-day assault on the commodity market was reversed as GOLD and SILVER rallied to new recent highs and even the OIL market reversed. Yesterday, I cautioned that the DOLLAR‘s failure to rally was a warning that all is not right in the world.

The coming BUDGET BATTLE is no longer a side-show but entering the main stage. Global investors are aware that the FED cannot be a passive observer for the FED‘s balance sheet holds more than $2 TRILLION DOLLARS of DEBT-based assets. If CONGRESS fails to get serious in controlling the fiscal situation, just exactly HOW IS THE FED GOING TO EXIT? There is continual discussion that the FED has many tools at hand to exit its bloated balance sheet but if the BOND VIGILANTES succeed in pushing the LONG RATES higher, exactly how is the going to dispose of its MBSs and TREASURIES? This is the problem going forward and other than monetization of the DEBT it is going to be a quagmire of uncertainty.

The markets are letting the financial world know that the FED and Congress have a serious problem. The DOLLAR and PRECIOUS METALS are sending warning signs. It seems that between all the FED speeches and the whirring fans of the computers processing the data for the FED MODELS, the warning sirens are not being heard. If tomorrow’s CPI number is a benign number–as the markets are looking at a headline of 0.5 percent and a core rate of 0.2 percent–and the DOLLAR and BOND markets get sold. The FED BETTER START LISTENING MORE AND TALKING LESS. The same goes for the FOOLS ON THE HILL.

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10 Responses to “Notes From Underground: Hey Mr.Bernanke and/FED–GOD GAVE YOU TWO EARS and ONE MOUTH SO LISTEN MORE AND SPEAK LESS!”

  1. Surfing The New Normal Says:

    Great Stuff Yra! Your expertise and market savvy are legendary. More please!!

  2. USIKPA Says:

    Yra, what ‘s wrong with the Fed NOT disposing of its MBSs and TREASURIES, AND raising interest on excess reserves?

    Why not make all those chasing phantom equity returns now, buy treasuries when the going gets rough?

    How can the FED be active observer?

  3. yra Says:

    USIKPA—There is nothing wrong with the FED disposing of its paper.But the FED’s doves are opposed of doing that as that would rein in the stimulus at too early a time in their opinion and be similar to the mistakes that were made in 1937 and hence I will refer to them as 37ers-that is not a criticism.So if the massive stimulus remains and the budget process fails t deliver what price will the FED be able to dispose of those purchased assets.The impact will be that long rates head significantly higher which will negatively impact equity prices as well as destroy the FED’s balance sheet.Remember that one of the main purposes of the QE2 was the PORTFOLIO BALANCE CHANNEL.If the bond vigilantes force rates higher every auction will mean that the TREASURY’s borrowing rates increase further damaging the U.S. budget and thus creating a severe negative feedback looop for the U.S.—thus the FED has much at stake as the single largest holder of U.S. priced debt instruments and will have to be an active observer.

  4. spdbrnr34 Says:

    The Fed is the Emperor w/ no clothes…they try to convince the mkt of non-truths…they have to remain dovish…they have to monetize debt – can foreigners afford to finance $1.5t deficits? Would they want to?

  5. MagnusT Says:

    Desperately waiting for the collapse.

  6. yra Says:

    Magnus–desperately I don’t know about.Then you get weeks last we just completed and the notes and bonds do nothing but rally,which is why trading and investing very seldom connect but be prepared when they do.It is amazing that the markets still do not exact a price from the U.S. but everything in time.I would like to believe that a leader woul;d arise who is willing to risk his/her office and actually try to turn the situation–but I am also a lifelong Cubfan

  7. Greg Bruno Says:

    Yra, thanks again for speaking with us last week.

    I have a few basic questions for you: what are the odds (as you see it) that this ends badly, how will the current Fed act in the face of a challenge to their credibility, and what do the major holders of US debt do in the face of a run on the dollar. Do they run for the hills or attempt to dictate policy to the govt?

    They way I read it is that Bernanke is terrified of a second great depression occurring on his watch and is he willing to risk our entire financial system in an attempt to prevent one. Is there any example in history of this being attempted that we can look to for guidance?

  8. yra Says:

    Greg–thanks for the the post.yes I think Bernanke is a classic “37er” and believes deeply in not making the mistakes of 1937 as he promised Milton friedman-How it ends is not been written but I think QE has put the FED into a very difficult position because of its bloated balance sheet.Remember that the FED is now the largest holder of U.S. debt so they have a very vested steak in the present budget discussions

  9. Greg Bruno Says:

    Yra – Can you remember another time in history when a man with this much (financial) power has made such a large, one directional bet with such confidence?

  10. yra Says:

    Probably–versailles but that was collective insanity but outside of that I would say not to my knowledge

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