Notes From Underground

Ladies and Gentlemen of the Senate: Just put forward the candidacy of Janet Yellen by acclimation because it is a done deal. It cannot be stopped and so any posturing for the voters back home and any potential donors is a waste of time and energy. Also, don’t provide the idiot talking heads with any “red meat” to keep their empty heads talking. This afternoon’s release of Yellen’s testimony proves that Vice Chairwoman Yellen is a very intuitive politician. HERE IS THE MOST ASTUTE POLITICAL PIECE OF THE STATEMENT (in my opinion):

“I believe that capital and liquidity rules and strong supervision are important tools for addressing the problem of financial institutions that, are regarded as ‘too big to fail.’ In writing new rules, however, the Fed should continue to limit the regulatory burden for community banks and smaller institutions, taking into account their distinct role and contributions.” The second part of the quote, which is underlined for my emphasis, will get political buy-in from all the forces opposed to the oligarchic power of the Washington/Wall Street nexus. The nod to the Main Street lending institutions will play well to the more conservative elements of the Republican Party for even the Tea Party has decried the massive burden that smaller banks have carried in support of the systemic risk created by the large Wall Street institutions. (Don’t tell me about WaMu or any other of the mortgage originators who were the foot soldiers in Wall Street’s originate-to-distribute game.)

CHAIRWOMAN-TO-BE YELLEN has placed herself in the coat of the “prairie populist” and this plays well in the 100-person theater of oration, and, as a fellow PRAIRIE POPULIST I salute her. As a hard money advocate I will find much to challenge but that is for another time. So Senators, save the drama and stop the posturing and approve by acclimation and fight the battles that you have some chance of winning.

This is the FED‘s dilemma for as Warsh notes: “Once the Fed begins to wind down its asset purchases, these market participants are likely to reassert their views with considerable force.” This is why the yield curve–2/10, 5/30–stand to steepen, for the FED can keep short rates low but market participants may have other ideas. Kevin Warsh is worried about the use of “forward guidance” and if the Banking Committee is to press Janet Yellen it OUGHT to be on the use of “forward guidance” and if she sees possible dangers in its utility.

***Another executive board member of the ECB was verbally trying to weaken the EURO today and it worked for about 30 minutes. The ECB’s chief economist Peter Praet (a German), told the WSJ that the ECB had many tools to prevent deflation. One, which caught the market’s attention, was when Herr Praet raised the possibility of the ECB placing negative rates on deposits at the ECB deposit facility. The second weapon was again the mention of LTRO or OMT, which President Draghi discussed ad nauseam. The recent increase in verbal promises of ECB action comes soon after last week’s ECB rate cut and is directed against German intransigence on the issue of a unified bank resolution authority, which stands to bear the costs of legacy bad loans. Germany prefers a trade-off. It will accept some financial responsibility but further measures of fiscal austerity have to be enacted by the profligate. The world is mounting an all-out attack on German economic policy.

Today ,the European Commission began a probe of Germany’s massive trade surplus and the negative impact it was having economic recovery in the debt-stressed nations. The IMF, U.S. Treasury and now the EU Commission have now all called on Germany and other surplus nations to reduce their savings rate and increase domestic spending. I  want to remind the new TROIKA that Germany has not yet finalized its election and the Merkel government has had to push back about possible coalition partner, SPD, not to raise taxes. Germany has promised to balance its budget by 2015, which is not a policy of enhancing domestic spending. Again, Germany is the major creditor of the EU so this is a very delicate situation for the global financial system. Financial  markets are priced for a very sanguine outcome to Draghi’s dilemma (let’s hope so). The first hint of market fear will be in the 2/10 spreads of the European peripherals. Any hint at funding problems will appear in rising yields of the two-year notes. As the holiday markets approach, proceed with the necessary caution and be alert to all the relative markets of importance.

***AND FOR CHRISTMAS OR HANUKKAH BUY YOUR FRIENDS, CLIENTS, STUDENTS, ENEMIES and everybody else a copy of the ROTTEN HEART OF EUROPE by the brilliant Bernard Connolly (the new introduction is worth the price). BUY it through me directly through PayPal without fees or through my Amazon page. If you order 10 OR MORE BOOKS I will discount the price dramatically–$7.00 plus shipping. Be prepared as 2014 sets up to be the year of decision in Europe and you can’t tell the players without a book (a great stocking stuffer indeed). Single books $13.00 total. As they say, get a seat at the table or find yourself on the menu. The Rotten Heart of Europe puts you at the table.

Tags: ECB, Euro, Fed Chairwoman, Fed Funds, Federal Reserve, forward guidance, Germany, Janet Yellen, Kevin Warsh, LTRO, Mario Draghi, OMT, Peter Praet

This entry was posted on November 13, 2013 at 8:13 pm and is filed under ECB, Fed. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.