Sound bites from the left. Sound bites to the right; here I am, stuck in the middle with you (STEALERS WHEEL). The House Budget Committee was in full political regalia as posturing for the home folks and November’s election was in full force. Most of the questions are redundant or ridiculous and in some cases, both. An exception was Committee Chairman Paul Ryan, who asked Mr.Bernanke if the FED‘s policies had corrupted the BOND markets that they stopped sending a credible signal. It has been a consistent theme of NOTES that the BOND market is broken as an indicator of inflation expectations because the FED‘s large scale asset program has created an artificial support to LONG-TERM BOND PRICES.
Bernanke parried Ryan’s assault on the FED‘s actions by citing the BOND prices of the GIIPS as when the market loses confidence then indeed the PRICES OF DEBT WILL SUFFER. Therefore the FED‘s buying program is acceptable to the market because rates continue to remain very low reflecting the market’s confidence in the FED.
WELL CHAIRMAN BERNANKE, OTHER MARKETS THAT ARE FREE FROM FED REPRESSION TELL A DIFFERENT STORY: GOLD IS BACK ON THE RISE AND THE DOLLAR IS VERY WEAK VERSUS OTHER CURRENCIES, WHICH THE MARKET DEEMS TO BE FAR MORE RESPONSIBLE IN THEIR FINANCIAL POLICIES. A MAN HEARS WHAT HE WANTS TO HEAR AND DISREGARDS THE REST (Simon and Garfunkel).
Further, Bernanke criticized the Europeans for moving to strict austerity budgets while their economies are so fragile. Forced austerity when the economy is weak destroys near-term budget projections. IN MY UNDERSTANDING OF CHAIRMAN BERNANKE’S WORDS, THE FED WILL BE FORCED TO BE EASIER FOR LONGER BECAUSE OF EUROPE’S ILL-CONCEIVED AUSTERITY PROGRAMS. Bernanke acknowledged that the FED‘s policies were difficult to manage in times of such turmoil, in which Chairman Ryan alluded to that it was similar “TO DIRECTING A CRUISE MISSILE THROUGH GOAL POSTS.” (That will probably be the sound bite that makes the mindless news.)
In a side discussion, Steve Liesman also added his views in opposition to Rick Santelli, that the continued low BOND RATES WERE PROOF POSITIVE THAT THE FED POLICY WAS THE CORRECT POLICY. Again, this argument is deeply flawed because it fails to take into account the markets need for SYSTEMIC QUALITY COLLATERAL. CREDIT USERS ARE FORCED TO COMPETE WITH THE FED’S QE BUYING AS THEY ARE SEARCHING FOR THE COLLATERAL TO KEEP THE REPO MARKET GOING, ESPECIALLY AS SO MUCH SOVEREIGN PAPER HAS BEEN LAID LOW BECAUSE OF THE PROBLEMS IN EUROPE. To say that long-TERM DEBT MARKETS REFLECT THE FED’S SUCCESS IS SUPERFICIAL AT BEST.
***Unemployment tomorrow. I don’t think this is important after the FOMC statement last week but we prepare nonetheless. First the Canadians release their data and the market is looking for 23,000 gain in jobs with a 7.5% rate. The last two releases were tepid but December did see a significant increase in manufacturing jobs, which we will look to see if the automotive sector in Ontario is in fact gaining traction. If Canadian manufacturing is increasing it will be a positive for the U.S. market as it would confirm recent U.S. manufacturing gains.
Ninety minutes later we will read the U.S. data, which is looking for 150,000 nonfarm payroll gain, and, more importantly, the average hours worked which gained last month and is expected to hold at 34.4 hours. The average hourly earnings is expected to rise 0.2% and if it is higher, it will be seen as a positive for consumer demand. The tricky data will be the UNEMPLOYMENT RATE–expected at 8.5%. If nonfarm payrolls increase but the rate rises it will be interpreted as a positive as it will mean that more people are renetering the labor force. Again, with the FED on hold post-FOMC it will take a very large number to truly impact the markets, something on the oreder of a 250,000 NFP increase will push the rates on the long end higher.
***A quick look on Merkel in China. The German Chancellor is trying to persuade the Chinese to become a major participant in the EFSF and the coming ESM. The Chinese have promised to ante up money before and failed to deliver so good luck Frau Merkel. The Chancellor also said she would challenge the Chinese on human rights and its policies toward Iran and Syria. Advice to Merkel: WHEN YOU ARE BEGGING FOR ALMS IT IS NOT SMART TO ADMONISH YOUR TARGET DONOR ON ITS BEHAVIOR. SO CHANCELLOR MERKEL, JUST CONTINUE BEGGING AND STOP THE MORAL POSTURING.