I feel like I’m the odd analyst out in that Bernanke failed to impress upon me that he is a DOVE in HAWKS’ feathers. Reading the FOMC statement over and over leaves me wondering just what made the statement so strong an anti-inflation stance. The FOMC release reiterated that the FED is relying on closing the output gaps, “including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate for an extended period.” This is not the musings of an inflation HAWK.

In the post-FOMC press conference, Mr.Bernanke clarified what “EXTENDED PERIOD” means for him–at least two or three FOMC meetings and he was being conservative in that line of reasoning. So it seems that the FED will not raise rates until the new year. Again, I am left to ponder the HAWKISH leanings of the FED.

The item that bothered me the most was Chairman Bernanke’s failure to stress the importance of Greece and the other peripherals as a global solvency problem. In response to a media question on the issue, the chairman said Greece was a concern but felt that having reviewed the direct exposure of U.S. banks it was not threatening although a small country default could cause global contagion. Bernanke felt that the greatest risk for U.S. banks was in their dealings with the large commercial banks of Europe. A credit crisis in Europe is a major financial event and U.S. banks and their clients have CDS exposure that won’t even appear on the balance sheet. The FED chairman should have been more forthcoming in what way the U.S. would move to help alleviate a financial crisis across the POND.

Another item that was widely discussed by the BERNANKE was the possibility of INFLATION TARGETS. It is well known that Mr. Bernanke is a supporter of the use of inflation targets but it is a questionable tool when the FED has been saddled with the DUAL MANDATE. Does unemployment have a higher priority then prices? If so, then the issue is laid to rest. If some analysts think the mere mention of INFLATION TARGETS is a hawkish stance then I am left grasping for straw to spin into GOLD. It is important to know how the FED is going to measure the INFLATION TARGET and will it be smoothed over time, allowing the FED to impose a regime of negative real rates when there is too much slack even in a period of rising prices?

As the June 30 date arrives and the QE2 program ends, the area of greatest interest for traders ought to be the 2/10 yield curve or any other curve people are comfortable with as an indicator of economic activity and FED credibility. After the end of the first QUANTITATIVE EASING PROGRAM, the FED proclaimed it had the necessary tools to remove the liquidity and the FED even ran small exercises of reverse repos. During that period between the QE1 expiration and the JACKSON HOLE SPEECH of August 27,2010, the 2/10 curve flattened about 75 basis points. The end of QE1 was expected to push long rates higher but the market was not cooperating and BOND FUTURES rallied and rates fell.

As the curve flattened, the EQUITIES DROPPED and the DOLLAR also staged a sizeable rally as the market was in “RISK OFF” mode for close to five months. Will the end of QE2 “yield” different results? This is the ultimate question for the markets. The 2/10 curve is currently 260 basis points. If there is no CREDIT CRUNCH IN EUROPE the curve may begin to steepen and that should mean a boost being long stocks, short bond futures and short the DOLLAR. It is too early to put in play but it will certainly be worth paying close attention. In paraphrasing the poem by William Butler Yeats (The Second Coming), the Hawks Cannot Hear the Hawker, The Middle Cannot Hold.

QUICK HITTER: Last week I pointed out how President Sarkozy was pointing the finger at speculators for hurting poor people in the emerging economies by using financial leverage to push food prices higher. I pointed out that the agricultural policies of France, the EU and the U.S. have done more harm to the poor of the world than any speculator.

By subsidizing their domestic producers and selling the surplus that they harvest to poor nations at depressed prices, the developed nations have crippled agricultural development. In tomorrow’s Financial Times there is an article that says the DOHA trade round will collapse because Brazil and others are not satisfied with the continued COTTON subsidies paid to U.S. and European farmers. Again, the hypocrisy of the developed world would make Holden Caulfield shudder, but I digress. The theme of tonight has been inflation hawks and doves. Mr.Sarkozy, in staying in the aviary you are hereby given the American Indian name, Walking Eagle, a bird so FULL OF SHIT IT CAN’T FLY.

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2 Responses to “Notes From Underground: WAS BERNANKE HAWKING A HAWKISH OUTLOOK???”

  1. Hardrock Says:

    The last line made the read worthwhile!

  2. Michael Greenberg Says:

    I dare you to say that on CNBC.

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