Notes From Underground: One Big Question For the FED

If the prices of commodities are falling because of increased margin requirements on ENERGY and PRECIOUS METALS, WHY DOESN’T THE FED JUST ASK FOR EMERGENCY POWERS TO CONTROL MARGINS FOR ALL INVESTMENTS? Chairman Bernanke is on the record as believing that INFLATIONARY PRESSURES ARE TRANSITORY. Well, it seems that the power to make higher commodity prices transitory is to raise margins and force the speculators to disgorge their positions. The increase in MARGINS and the RESULTING LIQUIDATION WOULD ALLOW THE FED TO MAINTAIN QE POLICIES WITHOUT THE FEAR OF TRANSITORY PRICE INCREASES.

The liquidity in the system would them have to seek other investments, probably in EQUITIES and REAL ESTATE, so the solution to the FED‘s DILEMMA OF TRANSITORY INFLATION AND FALLING HOME VALUES CAN BE SIMPLY ALLEVIATED BY CONTROLLING MARGINS. Wow, it is so simple unless, of course, there are other reasons for high commodity prices. The FED is on record as maintaining that commodity inflation has been a result of the shift in the demand curve brought about by the strong growth in the BRICS and other emerging economies (and possibly the impact from the vast amount of liquidity created by the world’s CENTRAL BANKS.)

If all the pundits are correct about the recent fall in prices being the result of INCREASED MARGINS, then the solution is so very simple. HMMM, maybe there was something learned from the discussions with the CHINESE.

In a news story tonight, it appears that Chancellor Merkel has thrown her support for ECB president to Mario Draghi of Italy. The readers of NOTES have known that I believed that AXEL WEBER would have been the best choice as he would have assuaged the fears of the German electorate by having a hard money man in charge of their GELT. As we know, WEBER was deemed too contentious and was thus tossed under the bus by Merkel and he is now teaching at the University of Chicago.

What promises Merkel received for supporting Mr. Draghi are presently unknown, but a badly weakened German chancellor may come to rue this choice. It seems the Draghi is highly respected in banking circles, but will the Bavarian Burghers be satisfied with an Italian banker with the entire EURO system in a fragile state and the ECB bordering on a possible quantitative easing program to bail out the heavily DEBT-STRESSED BANKS?

This will take a while to play out as Trichet is still in charge for several more months, but it will be worth paying attention to as Trichet’s term expires. The EURO was under pressure again today as investors are doubting the credibility of the EUROCRATS. It seems that the nose on PINNOCHIO’S FACE has grown so large as to be obvious to all except the wizards of Brussels. As the EURO was sold, the DOLLAR rose helping to generate the selling of risk assets–EQUITIES, COMMODITIES and anything else attached to DOLLAR based risk on investments. The fear of a EUROPEAN financial collapse sent risk takers to cover positions and wait for some type of “RESOLUTION.” Ha, this is not possible as of yet but the EUROPEAN situation will keep the FED on hold as Bernanke will not want to create a more difficult environment for Trichet to operate.

Tomorrow, the markets will see the RETAIL SALES number. Headline number looks to be 0.6%, while ex-autos and gas the market is looking for 0.5%. If we get a better number and the equities can’t hold, and the NOTES and BONDS rally it will be a sign that the markets are very nervous about the uncertainty in Europe and risk will continue to be unwound. We will also see the PPI data, which is anticipated at headline up 0.6%, while core PPI is thought to be 0.2%.

As with the RETAIL SALES, if the inflation data is more robust and the long end of the debt markets rally it will mean that the market is searching for safety. Be attuned to the signals the market will give. There is a great deal of uncertainty in the world that has been addicted to easy money. It is important to acknowledge the signs of portending fear.

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4 Responses to “Notes From Underground: One Big Question For the FED”

  1. Pat Lynch Says:

    Mr Harris,
    I seasoned amd smart trader has said that the logical move in oil with raised margins would have been higher. The stressed money was short and higher margins would have caused them to puke. As we all know human nature of a trader is to hang on to losers and be margined to hilt. Thus it makes no sense that the winners in this oil game would have been forced out of large winning trades. That is the longs running for the hills. And yes, I took your bait, it was to appealing not too!!
    So something obviously more is at work here.

  2. Fred E. Says:

    Raising margin requirements can have a very short term effect on disgorging positions from leveraged speculators. But long term commodity prices are influenced by fiat currency printing presses. Little Ben is the primary cause for escalating prices and inflation, and deflecting the causes to BRIC nation demand is at best disingenuous.

  3. Sartell Says:

    Very insightful Yra. The margin issue could not have been stated more succinctly. Maybe this was planned from the first time the “transitory” theme was introduced.

  4. yra Says:

    Sartell–thanks and what was written as tongue in cheek may have more credibility then I originally thought.But it deserves a thought because of the idiots on some television stations who have little perspective but just spout things and if they correlate for five minutes they must be right—again the medium is the message

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