Notes From Underground

While I have been on hiatus the financial markets have awaken to old problems and the damage to markets is real but the damage has been contained … for now. The concerns du jour are more of a political nature then economic but as this blog’s readers well know POLITICAL ECONOMY is the entire basis of NOTES FROM UNDERGROUND. What is political today will manifest itself economically and the opposite being true. Nothing illustrates this better than the  current rage over income inequality, thus wealth creation is less significant than its distribution.

Pete Seeger’s song, “Turn, Turn, Turn” reflects the idea that every policy has its season. The redistribution of a nation’s wealth is never an easy matter but the hypocrisy of the Washington/Wall Street’s concern is laughable. Corporate boardrooms of global corporations have done more to corrupt the wealth tables than the efforts of any small or medium businesses. Calpers and other guardians of employee pension funds have sat silently as corporate pay packets have exploded while the salaries of middle and lower management have been stuck at the same level for 30 years in real terms.

Now, there is no doubt that globalization has led to pressure on middle class wages and the reward of CAPITAL but corporate boards could have insured a more equitable distribution. Why should the hired guns of corporate boards be remunerated as if they were in entrepreneurs for many of the well paid were not responsible for the building of the business? This is not a critique of capitalism but rather the issue of malfeasance and greed in the board room. Obama speaks to redistribution while I urge greater rewards from the profit pool to the lower level employees: same profit pool different results. “IF I HAD A HAMMER” I would bust up the present governance of corporate boards for that is true crony capitalism.

“Where Have All The Flowers Gone” was the theme of the Davos gathering as the world’s self-chosen philosopher kings (and queens) were left wondering how the world’s financial were in turmoil in the face of the in-gathering of the global movers and shakers. I have railed about Davos during the past four years and believe that all attendees should be jailed for insider trading since the list of CEOs and political leaders were speaking to those with deep enough pockets hoping to mine nuggets of financial information. The question I am left asking (again) is if Raj Rajaratnam is guilty of acting on insider information, what exactly is exchanged for the exorbitant price charged to attendees? I am left to wonder if WE SHALL OVERCOME the moral failings of capitalism that the often invoked Adam Smith warned about: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.” In the true spirit of capitalism it is time to heed Adam Smith and put an end to the anti-capitalist conclave known as DAVOS. Oh, If I had a hammer.

***Tomorrow we get the announcement from the FOMC and Ben Bernanke’s last official meeting as chairman. The markets are anticipating the Fed to carry on with its ten billion of tapering even though recent economic data has been tepid. It seems that the investors have accepted the idea that the Fed desperately wants to exit QE as its balance sheet is too large for comfort. NOW THAT TURKEY AND INDIA have raised their overnight INTEREST RATES to help quell the turmoil in the emerging markets, the pressure will BE OFF THE FED TO NOT TAPER.

After the Central Bank of Turkey raised its overnight rate to 12% from 7.75%, the U.S. stock indexes rallied in relief that the TURKS were acting to quell the uncertainty. The problems in certain emerging markets are much greater than a mere rate raise –but the appearance of action seems to bring relief to investors.Raising rates in a slowing economy is not a recipe for success. Remember that Britain raised its overnight rates to 15% before succumbing to market realities. But the end result of the CBT rate rise will give the FED the relief it needs to KEEP ON TAPERING. The only surprise will be if the FOMC would abstain from tapering which would lead to a greater sense of nervousness in the financial markets.

***An hour after the FOMC release, the Reserve Bank of New Zealand (RBNZ) will announce its interest rate decision. Some analysts are looking for the RBNZ to raise rates by 0.25% to 2.75%, but in my opinion it will hold because of the relative strength of the KIWI to all of the world’s main currencies. Most importantly, the key AUSSIE/KIWI crossrate is at 35-year lows of 1.06. RBNZ Governor Graeme Wheeler has noted the strength of the KIWI previously as a reason to keep RBNZ interest rates steady. I expect the similar reasoning to hold sway.

***Lastly, Mario Draghi  and the ECB are still “Waist Deep In The Big Muddy.” President Draghi is doing what a good central banker does: buying time to help deal with its problems. The problem for Europe is a lack of growth while saddled with large private and public sector debt. The Eurocrats with Draghi’s support is trying to create a unified resolution mechanism to help deal with problem banks but the Germans will not sign on to bailing out the legacy debt problems of other European nations. Yesterday, Reuters reported that the Bundesbank put forward a proposition to tax the private wealth of a country’s citizens and bank depositors before asking any other central banks for financial aid. “A capital levy corresponds to the principle of national responsibility, according to which taxpayers are responsible for their government’s obligations before solidarity of other states is required.” The idea of a financial guarantor for Europe is causing Mario Draghi to remain in the morass of deleveraging as European banks are cutting bank loans in an effort to shore up balance sheets.

The financial markets are awaiting the results of the EU’s Asset Quality Review (AQR) and the ruling from the German Constitutional Court about the ECB‘s  bond rescue program for Italy, Spain, Ireland, Portugal and Greece. The ECB‘s  efforts have resulted in a tremendous rally in the peripheral bonds with much of the sovereign debt on the balance sheet of European domestic banks. President Draghi is “Waist Deep” as he waits for the FLOWERS TO GROW. Yes, Mario Draghi is going to have to escape the “Little Boxes” of  conventional thoughts that are keeping the ECB listening to the ticking of the clock. Confiscation of wealth is a real possibility in Europe as EU Finance Minster  Jeroen Djisselbloem said after the Cyprus bank debacle of last summer (Cyprus was a TEMPLATE for future BAIL-INS). Just some more of the thought from the  “Little Boxes.”

Tags: Aussie/Kiwi cross, Ben Bernanke, capitalism, Davos, Draghi, ECB, Fed, FOMC, QE, RBNZ

This entry was posted on January 28, 2014 at 8:58 pm and is filed under Central Banks, Currency. 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.