Notes From Underground: Yesterday Don’t Matter If It’s Gone

Wow! Wednesday’s market reaction to words not said was extraordinary. The LTRO went very much as expected and the selloff in the EURO was in step, but the reaction of the GOLD and SILVER to unspoken words was quite unusual. Many questions were raised as to the market reaction. The GOLD sell off is rational if the premier haven was elevated simply on the belief of further easing by the FED.

It seems that the GOLD story has been more about GOLD VERSUS OTHER FIAT CURRENCIES THAN SOLELY THE U.S. DOLLAR. The GOLD/YEN has been much more robust of late and after the latest LTRO by the ECB the liquidity story is shifting to other financial centers away from Wall Street. The key will be to watch support levels in the GOLD/EURO and GOLD/YEN to ascertain when the reversal in GOLD becomes the beginning of a real change in the market’s psychology.

Another issue that arises is the way the yield curve acted in the U.S. Treasury market. If the FED is done with QE it seems that the 5/30 spread should begin to FLATTEN. QE may be over but OPERATION TWIST is still in play and with the FED so openly concerned about the HOUSING MARKET, SOMA (System Open Market Account) will be acting to compress mortgage rates lower. However, the 5/30 has widened for the last two days as the market has sold off the 10- and 30-YEAR FUTURES in belief that the FED is on hold. This will become an important barometer for viewing the FED‘s desires for the Treasury market.

One thing that may be impacting TREASURY PRICES is the news about CHINA being a net seller of U.S. Treasuries to the amount of $100 BILLION as they look to diversify away from DOLLAR PAPER ASSETS. This recent news seems to be causing some selling as speculation builds about continued Chinese intentions. Does the Chinese Investment Corporation see EURO SOVEREIGN DEBT as a better alternative at the present high yields? Interesting that no Congress person or Senator asked Bernanke the question about Chinese selling and its impact upon the current FED policy.

***A very important article in the Financial Times today, “German Central Bank Hits at Draghi.” This was the front page headline and it is very unusual for the house paper of the EU to print a bold headline concerning a direct assault upon the beloved ECB. BUNDESBANK President Jens Weidmann warned that the ECB and Draghi policies of massive liquidity injections were risking the credit standing of the ECB and thus its largest benefactor, Germany. Mr. Weidmann also wields significant clout on the ECB‘s governing council, therefore his open criticism is not to be taken lightly.

“…the central bank risked endangering its reputation and called for a quick return to stricter rules on the collateral that the ECB accepts from banks in return for central bank funds. The criticism in a letter to Mr. Draghi was revealed last night by Germany’s Frankfurter Allgemeine Zeitung.”

This view is important because it was Axel Weber and Jurgen Stark who were forced out of the ECB for being in opposition to the ECB‘s policy. Jens Weidmann is a younger man and may not be so quick to backdown from criticizing the EUROPEAN POWER ELITE. Draghi may be “riding high in April but he could get shot down in May.”

***Chairman Bernanke spent his second day on the HILL and offered up very little that differed from yesterday’s HOUSE testimony. More important was the speech delivered by FED GOVERNOR SARAH RASKIN: “Accommodative Monetary Policy and Its Effects on Savers.” The newest FED Governor was attempting to make the case that the Zero Interest Rate Policy (ZIRP) really doesn’t have a significant effect on the overall economy.”

In addition, interest-bearing assets represent only a modest portion of overall household assets. According to the Federal Reserve’s Survey of Consumer Finances, less than 75 of total household assets are directly held in transaction accounts, CDs, saving bonds and BONDS. Instead, the bulk of household wealth is held in stocks, retirement accounts, business equity and real estate. For these other types of assets, rates of return depend primarily on the strength of the economy and how fast the economy is growing.

HERE IS THE RATIONALE AND JUSTIFICATION FOR THE BERNANKE PORTFOLIO BALANCE CHANNEL. Governor Raskin is disingenuous when she states that 7% number for aren’t RETIREMENT ACCOUNTS AND PENSIONS part of the interest-earning vehicles that most people calculate into their savings formula? The FED GOVERNOR SHOULD READ CARMEN REINHART’S WORK ON FINANCIAL REPRESSION. Raskin goes on to address the criticism of how low interest rates discourage household savings.

“Currently, households have a number of reasons to save in addition to their desire to earn interest. For instance, they need to be prepared for unexpected expenses and rebuild the retirement nest eggs that were depleted by losses in equity and housing wealth during the recession. In fact, the portion of disposable income that households’ saving has risen considerably since the recession began.”

Honestly, this speech is so sophomoric that it makes one wonder what credentials one needs to become a FED GOVERNOR. Hey Raskin, is it possible that ZIRP causes an adverse feedback loop for as interest earnings drop people save more to make up for diminished income and for those of a different disposition are forced to take on greater risk? This speech should make all investors stop and think about the FED maintaining its role as a serial BUBBLE BLOWER. FINANCIAL REPRESSION IS THE OUTCOME.

***Quick view on the impact of LTRO: The Italian 2/10 curve steepened out to +319 basis points as both the 10-year BTP and the 2-year yields dropped dramatically. In fact, Italian 2-YEAR YIELDS ARE BELOW SPAIN’S. The Portuguese 2/10 experienced a BULL STEEPENING as the 2-year Portuguese note yield fell while the 10-year actually increased its yield, but the net effect is that the PORTUGUESE CURVE is now +127 basis points.

More liquidity begets steepening curves while a contraction will result in a flattening. What happened to the U.S. post-Bernanke testimony? Another one we will watch is the AUSSIE 2/10, which is a very flat +32 basis points. This should be concerning the RBA that it may be too TIGHT.






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5 Responses to “Notes From Underground: Yesterday Don’t Matter If It’s Gone”

  1. Peter Says:

    Yra, you nailed it again, esp with your Raskin comments. These ditzes run our financial lives, yet have not a clue of how the real world works. They’ve spent all of their careers sucking up to their academic “betters” in order to feast at Jackson Hole. She’s probably a Summers acolyte.

  2. huh? Says:

  3. Writer X Says:

    Yra writes “it makes one wonder what credentials one needs to become a FED GOVERNOR”…and ditto that wonder for becoming Fed Chairman.

    Ben Bernanke: “Congressman, I agree with you. Growth doesn’t cause inflation” (July 20, 2006)

    Ben Bernanke: “Estimes of long-term productivity growth are needed to determine the rate of output growth that the economy can sustain in the long run without generating inflationary pressures.” (August 31, 2006)

    Man the lifeboats!!!!!!

  4. heat Says:

    The reaction in the gold market was interesting given the *unsaid* words. That being said, does anyone actually believe that there is an exit strategy from this experiment of global money printing?

    CBs have printed nearly $7 trillion USDs worth of money and while nearly all of it has been deposited back at the central banks as excess reserves how on earth are central banks going to exit from this experiment?

    The market is delusional to think that the Fed, BOJ, ECB and the BOE actually have an exit strategy – when you magnify your debt by
    the multiples that have taken place the interest expense is the end game when rates rise to normal levels. I think there is something wise in the work of Dylan Grice, Kyle Bass etc…

    Gold paper will always be at the mercy of market vagaries/manipulation but logically I do not see an end to this game of financial debauchery. I’m not a gold bug but I don’t see an exit and on that basis I think you look to accumulate physical gold on dips.

  5. yra Says:

    Heat: good post and it raises another question–what will be the impact if the world’s central banks try to exit at the same time—deleveraging to the nth power—has anybody entertained that idea?

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