Notes From Underground: FOMC Minutes (Upon Further Review)

Tonight will be all quick hitters as the big news is sparse, to say the least. The Fed released the minutes of the September FOMC meeting. Besides discussing the idea of QE3, the most interesting read was that Fisher was not as hawkish as his NO VOTE seemed. This makes sense as his speeches this week have been pretty DOVISH and I had thought that he was contradicting himself.

In the minutes, it summarizes Fisher’s vote in the following: “ANY REDUCTION IN LONG-TERM TREASURY RATES RESULTING FROM THIS POLICY ACTION WOULD LIKELY LEAD TO FURTHER HOARDING BY SAVERS, WITH COUNTERPRODUCTIVE RESULTS ON BUSINESS AND CONSUMER CONFIDENCE AND SPENDING BEHAVIORS.” President Fisher believed that policymakers should focus “ON IMPROVING THE MONETARY POLICY TRANSMISSION MECHANISM, PARTICULARLY WITH REGARD TO THE ACTIVITY OF COMMUNITY BANKS, WHICH ARE VITAL TO SMALL BUSINESS LENDING AND JOB CREATION.” Therefore, Richard Fisher is not the hawk he has been labeled.

He is not opposed to the FED being aggressive. He just differs on the mechanism for he believes QE and the TWIST to be inefficient promoters of credit creation. In the FOMC MINUTES we learn that the interest on excess reserves (IOER) rate was not lowered because some voters thought … “that a recent change in deposit insurance effectively reduced the return that banks were receiving on balance.” The FED is merely subsidizing the banks through the IOER interest payments to reduce the burden from increased fees from the FDIC. Why doesn’t the FED just give its earnings directly to the FDIC and remove all the middlemen? At the end of the day it seems that the hawks on the FOMC are a figment of one’s imagination.

Quick Hitter #1: The EURO was strong again today as the RISK-ON crowd believes that the Merkozy secret plan is in effect real and will provide the needed finances to protect the European and global financial systems. The plan will be enhanced as the G-20 meets in Paris this weekend and Trichet and Geithner will be in the spotlight.

Yesterday, Trichet said that the sovereign crisis “has reached a SYSTEMIC DIMENSION.” Wow, Jean-Claude, where have you been? The European bond market has been saying that for 18 months. (Oh, but how can the collective wisdom of the markets be more astute than a French central banker … preposterous?) The market is now expecting something GRAND from the G-20 but I caution that the BRICs will be exacting a large price from the G-7 core and PUTIN seems to be in a very mischievous mood. The COLONIAL WORLD of the COLD WAR PERIOD IS GONE and the rules of the game have changed dramatically. The EURO RALLY was even able to absorb a failed auction on the German 30-year BUND, which would have typically be seen as a weakening in the financial foundation of all of Europe.

Quick Hitter #2: Rumors abound that the BoJ is going to invoke a plan similar to the SWISS and announce a floor to the euro/yen cross. The YEN was sold off today on that rumor and coupled with the RISK-ON mood of the markets the EURO/YEN was the featured currency pair. It is important to check your technicals to see if this is merely a correction or the possible start of the YEN correcting as the place holder of the world’s angst. If the YEN starts to weaken, it could impact many asset classes as it would signal to the EQUITIES that the risk-off paradigm is going to change.

The key may well be the NIKKEI, which has underperformed most of the developed world’s stock markets. At this time, it is only rumors but be aware of the different groups a weakening YEN could affect. The YEN may also have weakened as a result of the Senate vote on CURRENCY MANIPULATION, but with the YEN close to its all-time high against the DOLLAR, that would be very doubtful. The Japanese have certainly borne the brunt of the RISK-OFF paradigm so this will be worth watching.

Quick Hitter #3: It is a very cold day in October when I find myself in agreement with Alan Greenspan. Friday on CNBC, the KING OF HEARTS (sorry Alan Bates) noted that he was concerned about the widening spread between the 10-YEAR German and French BONDS. It is a good point and everybody should be attuned to this spread as it will reflect the markets real concerns about the state of the FRENCH FINANCIAL SYSTEM and its ability to maintain its AAA credit rating.

The French want to utilize the EFSF to recapitalize European Banks rather than do it nation by nation. This is a major sticking point between Merkel and Sarkozy so the spread will be a good barometer of what the market genuinely believes. On a positive note, the IRISH 2/10 curve is very healthy as it has a slope of +145 basis points, while Greece is -4300 basis points and Portugal remains at a -470.

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9 Responses to “Notes From Underground: FOMC Minutes (Upon Further Review)”

  1. Peter Says:

    Yra,

    very good missive.

    I have two question for anyone who can respond:

    1. As to Dexia Bank, will the sovereigns ( Belgium, Luxembourg and France) honor all derivative contracts, which Dexia entered into (as guarantor).

    2. As to all banks, who (what nations or entities) will compel the banks to stop playing the derivatives game.

    My belief is that the derivatives game will freeze up, when the buyers of insurance balk, realizing that the sellers are insolvent and can not pay in the event of default.

    peter

  2. rohrintl Says:

    Hi Yra-
    109 area is the key trend res. for EUR/JPY. Confluence: intersection of many factors.

    And Trichet may be somewhat better than others in Europe on certain points, but dirigisme (rigid statist view) still rules. I mean. c’mon. Merkel was peeved the markets had the temerity to act up while she was on holiday in August; what else should we expect?

    Hope things are great-
    -Alan

  3. Notes From Underground: FOMC Minutes (Upon Further Review) « Jim Sinclair's Mineset Says:

    […] More… […]

  4. Joe Says:

    >“ANY REDUCTION IN LONG-TERM TREASURY RATES RESULTING FROM THIS POLICY ACTION WOULD LIKELY LEAD TO FURTHER HOARDING BY SAVERS, WITH COUNTERPRODUCTIVE RESULTS ON BUSINESS AND CONSUMER CONFIDENCE AND SPENDING BEHAVIORS.”<
    A banking official believes savers are hoarders? Interesting.

  5. dotti Says:

    Re: >“ANY REDUCTION IN LONG-TERM TREASURY RATES RESULTING FROM THIS POLICY ACTION WOULD LIKELY LEAD TO FURTHER HOARDING BY SAVERS, WITH COUNTERPRODUCTIVE RESULTS ON BUSINESS AND CONSUMER CONFIDENCE AND SPENDING BEHAVIORS.”<
    A banking official believes savers are hoarders? Interesting.

    Joe, I like your comment!!! "Hoarding" is a pejorative term to start with. To apply it to savers is beyond ridiculous!

  6. Joe Says:

    I think the bankers view anything that slows “the velocity of money” (perpetual expansion of the monetary base notwithstanding) as obstructionist meddling in their lurid affairs and a treasonous act of “hoarding”

  7. yra Says:

    Peter–good questions on the issue of insurance derivatives and the systemic impact.Looking back on the Bear Stearns /JPM deal,I believe that the U.S. was concerned that there was so much outstanding derivatives on a bear stearns bankruptcy that they couldn’t let it happen as the counter parties would have created a major contagion issue.The same certainly exists in Europe which is why the issue of “EMPTY CREDITOR” continues to pop up.Euro regulators don’t want to pay speculators for positions taken on a sovereign or a bank and thus have scared the markets and moved legitimate hedgers to seek alternatives to CDS,thus we get the selling of all bank stocks as a hedge and more importantly the selling of the DAX as the ultimate hedge on all of Europe.It is a problem as money will always seek its weakest point to attack[like water] and the impact has become globally systemic as all equity markets respond to the weakness in the DAX and European bank stocks for the lack of a liquid CDS market.It seems that the EUROCRATS in their limited wisdom wish to break the derivatives market so there is no effective barometer for their ill-conceived policies.

  8. Peter Says:

    Yra,

    understand. The speculator has the assurance that the market maker and the market itself will pay him when he liquidates his position. I guess that the difference is leverage. 50% margin on stocks, options and indexes vs much higher leverage with derivative products bought and sold in the over the counter market.

    peter

  9. yra Says:

    That is certainly part of the problem.also, remember they are still trying to resolve the issues of Lehman and its collateral

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