Notes From Underground: It’s Raining Liquidity All Over the World

Friday’s unemployment report solidified the TRIFECTA of LIQUIDITY for the week. ECB President Draghi seeded the “liquidity clouds” at Thursday’s press conference by announcing the installation of the OTM (outright monetary transaction), which will allow the ECB/ESM to purchase unlimited amounts of sovereign debt of up to three-year duration–of course with conditions for those asking for help. Draghi is hoping to buy the whole EU project enough time so that a FISCAL UNION CAN BE FORMED WITH THE ABILITY FOR THE EU TO ISSUE A TRUE EUROBOND.

Thursday night provided the second leg of the TRIFECTA as Premier Wen Jiabao of China announced that the Chinese would embark on a $158 billion infrastructure plan, building subways, bridges and some type of national highway system. It may have been Nixon who went to China but Hu Jintao is taking a page out of the Eisenhower development playbook by embarking on a plan to build 2,000 kilometers of roads. The global equity markets and most other asset classes had rallied after the Chinese announcement. COPPER WAS LEADING THE EARLY RALLY PRIOR TO THE UNEMPLOYMENT NUMBER as the industrial metals were substantially higher while the GOLD was actually trading $10 lower. The COPPER had been the weakest of the major metals but the Chinese data infers that demand will pick up to meet the plans for the massive infrastructure projects.

When the U.S. unemployment data was released, the GOLD and SILVER rallied hard as the markets are firmly convinced that a new round of QE will be discussed and probably approved at this week’s FOMC meeting. The addition of 96,000 jobs was especially disappointing because of the September 6 ADP release of a 201,000 gain. While the actual rate dropped to 8.1% from 8.3% this was due to a large drop in the numbers of people taken off the employment rolls. (The national rate of labor participation is at a 30 year low of 63.5%.) This participation rate is being spun by all those with a political agenda, but for NOTES FROM UNDERGROUND the only comment is the number and its meaning as to the underlying structure of the job market and how the FED will interpret it. (IF YOU READ THIS BLOG FOR PARTISANSHIP, GO ELSEWHERE.)

The market is of the opinion that the FED will move to either an extension of the zero bound rate or else actually announce some type of new liquidity. I AM NOT AS CONVINCED AS THE MARKET THAT WE WILL SEE A NEW QE BUT RATHER SOMETHING MORE CREATIVE. A NEW QE MAY THREATEN THE RENEWED FLATTENING OF THE YIELD CURVE AS WELL AS PUTTING MORE STRAIN ON THE ALREADY STRESSED REPO MARKET BY DEPRIVING THE FINANCIAL SYSTEM OF HIGH QUALITY COLLATERAL. ALL LIQUIDITY IS NOT CREATED EQUAL.

So I will offer up an alternative to a QE program, which will be more stimulative than just merely having the FED increase its balance sheet. I SUGGEST THAT THE FED SHOULD FOLLOW ST. LOUIS FED PRESIDENT JAMES BULLARD’S SUGGESTION AND LOWER THE RATE ON IOER TO ZERO WITH A THREAT TO GO NEGATIVE RATES IF NECESSARY. This would help the FED punish the arrogance of the MONEY MARKET FUNDS, while not putting flattening pressure on the YIELD CURVE. In discussing this with several people I respect, the issue that was most frequently raised is that negative IOER would unduly punish the banks.

So, THE SECOND PART I SUGGEST IS THAT THE FED ANNOUNCE A PLAN SIMILAR TO WHAT THE BANK OF ENGLAND DID IN PUTTING FORTH A FUNDING FOR LENDING SCHEME. In putting forth such a program, the Fed can reward banks for making loans to qualified individuals and small businesses currently struggling to find access to credit. The MONEY FUNDS would be punished for their intransigence on the Fed’s desire for the MONEY MARKET INDUSTRY to establish a buffer and reserve funds to prevent  a LEHMANESQUE RUN. This is my plan to help get some velocity into the financial markets without undertaking another QE or TWIST program. QE in search of a PORTFOLIO BALANCE CHANNEL is no virtue, but it certainly may be a vice.

***Quick Hitters
The Canadian unemployment report was far better than expected as 34,000 jobs were created versus an expected 10,000. The unemployment rate stayed at 7.3% but the outstanding feature was that 34,000 jobs were created even though the Canadian construction industry LOST 44,000 jobs. This is significant because the BOC and Finance Minister Flaherty have both been concerned about a boom in construction due to the continued  maintenance of low interest rates. So a slowing in construction is a good thing but is not yet a major negative for the Canadian economy. Following the report, BOC Governor Mark Carney told domestic manufacturers that Canada’s strong currency was not due to a bout of the “DUTCH DISEASE” (solely commodity driven, in this case oil), thus Canadian manufacturing is not down because of the strong currency but rather due to weakness in the global economy.
The strong currency has kept interest rates accommodative for longer than the BOC would like but moves to weaken the CANADIAN DOLLAR would undermine the bank’s credibility. Bottom line to Canada’s manufacturing base: Keep enhancing manufacturing techniques and productivity to make yourselves globally competitive. In a further positive development for Canada, Prime Minister Harper and Hu Jintao signed an agreement over the weekend at Asia Conference in which China and Canada pledge to protect foreign investors in each other’s respective countries. As China scours the globe for raw materials, it seems that Canada wishes to be a major recipient of Chinese funds … just on quality terms.
In a further note to the DRAGHI PLAN, there was a September 4 BLOOMBERG article, “ECB’S DRAGHI CRITICIZES GLOBAL REGULATORS’ BANK LIQUIDITY RULE.” The article reflects how Draghi is on a major offensive to free up lending in the euro zone and it is more than the Bundesbank he is challenging. The new Basel 3 plan is under attack for being too restrictive on the large European banks by requiring that banks hold 30 days of high quality, easily sellable collateral as a backstop to any credit event. This is known as the LIQUIDITY COVERAGE RATIO. President Draghi wants greater latitude for the types of assets that can be used for the LCR requirements.
Draghi has further raised the battle of liquidity by COURTING IMF DIRECTOR Christine Lagarde. Draghi is attempting to find a way for the IMF to be the arbiter of CONDITIONALITY ON WHICH THE OTM IS BASED. THE IMF WILL PROVIDE FUNDING TO ITALY AND SPAIN AND THUS BECOME THE AUDITOR FOR MEETING THE FISCAL REQUIREMENTS THAT HAVE BEEN AGREED TO. IT WILL BE IMF PERSONNEL RATHER THAN GERMANS THAT WILL BE POURING OVER THE BOOKS AND ENFORCING THE AGREED TO IMF PROVISIONS. THIS IS ALWAYS THE COVENANT FOR THOSE WHO GET IMF FUNDS. It seems that in the world of central bank leaders, BEN BERNANKE IS A HEDGEHOG BASED ON 1937 and QE PROGRAMS, WHILE MARIO DRAGHI IS TRULY THE FOX.
Final point for the night: If Chairman Bernanke refers to the U.S unemployment situation as “GRAVE,” what is his opinion on the 11.2% unemployment for the entire EU–and let’s not think about the individual numbers for SPAIN, GREECE, PORTUGAL, ITALY and IRELAND? The FOX has much  graver matters to deal with than the HEDGEHOG.

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

5 Responses to “Notes From Underground: It’s Raining Liquidity All Over the World”

  1. Pat Lynch Says:

    I’m ready for a fashionable politically incorrect fox hunt! Release the dogs and blow the trumpet!

  2. heat Says:

    Yra – great insight as always. I thought you were of the opinion that Ben would check to Congress as doing anything else would mean that the Fed is not impartial to politics.

    https://yrah53.wordpress.com/2012/08/22/disgust/

    Welcome your thoughts as always.

  3. yra harris Says:

    Heat–I think that Ben is not wanting to serve as Schumer’s –monkey boy—which is why he need to become much more creative.

  4. kevinwaspi Says:

    Also interesting out of the news last week was the 176,000 new food stamp recipients in the month of August. With that and the 96,000 new jobs, I’m going to start the new “Social Index” of America to track. Food Stamp additions/job additions. Let the record show the August index stand at a “robust” 1.8!
    Kevin

  5. yra harris Says:

    Professor–I saw that.Also ,the number of people on disability has grown dramatically over the last 3 years

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: