Notes From Underground: A Genuine Disgust With the Analysis of the FOMC MINUTES

OKAY, so the FOMC minutes were released and all the pundits who never trade were kibbitzing about the THIRD coming of QE. Upon several reviews of the MINUTES, I AM OF A FAR DIFFERENT OPINION. AND, UNLIKE THE PUNDITS OF THE GREAT WASTELAND, MY MONEY TALKS WHILE THEIR BULLSHIT WALKS. Yes, it is indeed frustrating to hear opinions morph into facts. As I reread the FOMC MINUTES I fail to see the certainty of a FED ACTION AT THE NEXT FOMC MEETING AND I OPINE THAT BERNANKE WILL NOT OFFER ANY GREAT INSIGHTS AT THE JACKSON HOLE SYMPOSIUM. AGAIN, ANY FED ACTION WOULD BE A REWARD TO THE CONGRESSIONAL DERELICTS WHO CONTINUALLY FAIL TO DO THEIR DUTY AND CONSTRUCT A RATIONAL FISCAL POLICY.

The FOMC MINUTES had many references to financial problems in Europe, which is unusual for the myopic FOMC and their U.S.-based chauvinism, so EUROPE does take on an added importance. And what does the market do after the MINUTES ARE RELEASED? WHY, BUY EUROS, OF COURSE. So the reason for FED concern leads traders to buy the currency that is the basis of FED ANGST. “And they saw the possibilities of an intensification of strains in the Euro area and a sharper-than-anticipated U.S. fiscal consolidation as significant downside risks to the economic outlook.” HMMM, certainly reason to buy EUROS and to also Congress off the hook for the “fiscal cliff” crisis. In another concern voiced by an FOMC member the minutes say, “One participant posited that the sharp decline in net worth and reduced credit availability in recent years not only weighed on aggregate demand, but also reduced aggregate supply by hampering new business formation and product innovation….”

In my opinion this FOMC member needs to read some of Bernanke’s text books as the participant needs to understand the concept of INTERTEMPORAL DISLOCATION. When the FED lowers rates to spur demand in a balance sheet recession, businesses don’t invest in capital or labor but the future remains uncertain as so much demand is BROUGHT FORWARD FROM THE FUTURE–think about the impact of CASH FOR CLUNKERS. Initial demand for autos increased but for the next three years demand tumbled. As the future remains uncertain firms are leery of capital investment and will err on the side of maintaining the present amount of capital formation.

This is one of the biggest drags on the European economy as firms are nervous about the installation of austerity programs and thus ADVERSE FEEDBACK LOOPS. As the concept of PUSHING ON A STRING reveals, A CENTRAL BANK CAN RAISE RATES TO STOP A BUSINESSMAN FROM BORROWING FOR INVESTMENT BUT IT CANNOT LOWER RATES ENOUGH IF THE FIRMS OWNER IS FEARFUL ABOUT ECONOMIC GROWTH (Joseph Schumpeter).

***As further proof of the EU’s dramatic slowdown, last night the Japanese trade data was released and Japan’s trade surplus turned into a deficit as exports to EUROPE and CHINA SLOWED. Japanese exports to the EU dropped 25% month over month as the rising rates in the EU peripheries and the enactment of austerity budgets is beginning to impact Asia.The uncertainty in the Chinese economy, partly a result of the European malaise, is having an impact on an economy overly dependent on exports. The result of the negative news on Japanese exports was dwarfed by the FOMC MINUTES, RESULTING IN A YEN RALLY OF MORE THAN 1%. That is what the Japanese need a stronger YEN. Anybody home at the MOF or the BOJ as Japanese domiciled corporations are being ravaged and hollowed out by the ÜBER YEN.

***Adding to further concern about Europe was the Reserve Bank of Australia (RBA) release of its minutes in which Governor Stevens highlighted the RBA’s views on the EU. “In Europe, timely indicators suggested that economic activity had contracted in the June quarter with declines in both consumption and investment. Labour markets remain very weak, particularly in crisis economies….” The RBA also notes, “while the competitiveness of the crisis economies had been improving, members noted that further significant economic adjustment seemed necessary and the challenge ahead for the EURO area remained substantial.” So, it seems that the G-20 is truly concerned about EUROLAND. Thus, it seems time to dust off the EURO’s resistance areas and look for places to sell the EURO. The last thing the DRAGHI ECB NEEDS IS A STRENGTHENING CURRENCY. Mario, ABOUT THOSE BOND CAPS…

***Today, Bank of Canada Governor Mark Carney delivered a strong speech to a union convention of the CANADIAN AUTO WORKERS. Imagine Chairman Bernanke facing a UAW convention and raising the issue of improving exports. “Given our dependence on the U.S. market, our exports are still below their pre-recession peak … Some blame this on the persistent strength of the CANADIAN DOLLAR. While there is some truth in that, it is not the most important reason. Over the past decade, our poor export performance has been explained two-thirds by the market structure and one-third by competitiveness. Of the latter, about two -thirds is the CURRENCY while the rest is labor costs and productivity. So, net, our strong currency explains only about 20% of our poor export performance.”

This is such a straight forward speech to what could be a hostile group that Mark Carney gets our vote for the CENTRAL BANKER OF THE YEAR–just a discussion about how the economy needs to improve its productivity. A wonderful clear and concise statement on a day ladened with questionable analysis that passed for FACT. AND STILL THE MARKET SOLD THE CANADIAN DOLLAR  another dose of 2+2=5.

 

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10 Responses to “Notes From Underground: A Genuine Disgust With the Analysis of the FOMC MINUTES”

  1. algotr8der Says:

    Hi yra, great post and analysis as always. I too was disgusted by the response after I read through the fomc minutes. Seems like today was a dose of confirmation bias – they wanted to read about more stimulus and that is what they read. It seems like the market is getting ready to take a dump next week after the ben speaks. Load up on AAPL puts as the skew is attractive to buy short dated puts.

    algotr8der

  2. i'm not here Says:

    Local economies will affect global trade balances as no one wants and/or has the money to spend, a worldwide debt recession.

    The Fukushima disaster is slowly killing Japan but unlike old Russia with Chernobyl, there is no where for them (Japan) to run.

    And while the rule-of-law takes a hike in the US and Congress’s approval rating is lower than mud, it doesn’t paint a very pretty picture of the future.

  3. Víctor Hernández Says:

    Yra,

    Thank you very much for your work, you are one of the most knowledgeable americans about european issues.

    I would like to know your opinion about what I name “The easing paradox”. It seems that each time the “European Easing Party” (i.e. Mr. Draghi, Rajoy, Monti and now Merkel) won a game, the euro strengthen, against my naive logic: more easing, weaker currency. Also, taken advantage of your kindness, Do you consider gold’s spike post FOMC minutes as another consequence of misunderstanding the report?

    I wish you the best

  4. yra Says:

    Victor–thank you for your kind words.I agree with you totally on how the market interprets the EEP–the paradox is that Draghi wants the EURO LOWER but the algo risk on traders dominate the market at times .The good thing is that the “correlations” are beginning to breakdown[I will blog about this soon].The GOLD/EURO has been a big indicator for me because of the paradox of the EURO—Mario Draghi is praying for the EURO to break but in time we will know.

  5. rob logan Says:

    I am a CAW (Canadian Auto Worker) member and am picking myself up off the floor.
    here’s a short clip CAW posted of Mr. Carney’s speech

    http://www.livestream.com/caw2012/video?clipId=pla_53ab1bed-c5fc-4474-95af-304264a57709

    too bad Carney wasn’t running our union lol

  6. yra Says:

    Rob–I don’t know if you are being sarcastic but my point about Carney was the honesty of the dialogue he provides versus the shit that the maestro and others have shoved at the american people and I will not even go into trichet,duisenberg and Draghi.The clearity of Carney’s speech is amazing and that was my point

    • rob logan Says:

      sorry yra … sarcasm was directed to the self serving union leaders … they looked like a bunch of clowns, especially compared with a class act like Carney

  7. Dustin L. Says:

    Yra and Victor- While I agree theory in a static world would point to easing=>declining Euro. However, Europe for one is not alone in their easing efforts, we are in the midst of a currency war. Also, how much of the shorting of the Euro was based on the anticipation of monetization? With other nations now starting to get more focus back on their problems while Europe starts to look at possible “solutions” and seriously hint at engaging in the anticipated action, the excessively one-sided short Euro trade is starting to unwind. And as Yra said, the algos start to take over from there. Will the Euro appreciate against Gold over the long run? I very much doubt it. Will the Euro rise against the Yen and the USD? I tend to think so. I try not to argue with the markets too much and this seems to be the markets message right now. I am particularly bullish the Eur/JPY. I continue to feel that we are entering a real changing period for markets, especially as the RORO paradigm shows signs of breaking down. The every changing market cycle certainly has taken it’s time with this one. I look forward to your piece about this Yra.

    Good trading my friends.

  8. algotr8der Says:

    Yra, what are your thoughts on QE3? Everyone I talk to now thinks QE3 is virtually in the cards for September. Funny, how the market thought it was a certainty during Jackson Hole and now it is a virtual certainty to happen in Sept. I don’t think its coming pre-election but that is my 2 cents.

    Even some of these macro guys think its in the cards for Sep:

    “Most brokers now appear to expect some sort of Fed easing in September, with the extension of the rate guidance as the consensus favorite.”

    http://globalmacrotrading.wordpress.com/

  9. yra Says:

    Algo—I don’t think so because Schumer made a classic mistake by backing Bernanke into a corner by saying that FED QE is all there is—Bernanke has gone from theoretical economics to the realm of POLITICAL ECONOMY—no models can predict all of that

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