Notes From Underground

Friday’s jobs data was almost as the pundits had predicted. Why was there so much activity when the nonfarm payrolls and average hourly earnings and length of work week were basically the right on the consensus predictions? Yes, I’m aware that the “whisper number” was 250,000-plus due to the removal of harsh weather conditions. However, if that was the case, the dollar should have weakened and the short-end of the U.S. yield curve OUGHT to have outperformed the long end resulting in a STEEPENING of the 2/10 (none of which occurred). The 2/10 curve actually flattened as the U.S. stock markets began selling off, a drop initiated by the Nasdaq 100’s key momentum stocks. The weekly charts of the S&P and the Nasdaq took different turns as the SPOOs closed higher on the week and the Nasdaq closed lower, an indication of some reallocation from the momentum-oriented stocks to the more solid large-cap, earnings-based equities.

It’s far too early to determine if this is the beginning of a trend but it’s certainly worth watching. Also, the yield curves need to be watched for any type of movement into bonds. The 2/10 yield curve is healthy and not indicating any type of stress in the financial system. The unemployment data SHOULD have resulted in the 2/10 widening as the moderate rise in NFP since no increase in average hourly earnings plays right into Chair Yellen’s stated view about continued slack in labor markets. The question needs to be addressed: Is Janet Yellen more of a moral philosopher or a data-driven economist? Yellen’s stance on unemployment is right from a moral perspective but is it the stance that the world’s most important central banker should take in determining policy? These questions are especially important as the U.S. is the provider of the world’s currency, and, in a fiat currency world the main task for the Fed is to maintain the credibility of the U.S. dollar. (Nothing validates a central bank’s success then the preservation of its currency as a reliable store of value.) While trying to find an acceptable level of wage growth and low unemployment Chair Yellen must be vigilant in protecting the “exorbitant privilege” of the U.S. and the dollar. Markets will be on alert and the vigilance will be found in the yield curves and of course the world’s demand for alternative assets.

***Prior to the release of the U.S. jobs number, GOLD was already $10 higher following reports from Europe that the ECB had “modeled bond purchases of ONE TRILLION EUROS. Remember this is just a rumor but it did put a bid to the gold. Keep watching the GOLD/EURO and GOLD/YEN for support and resistance levels to determine if investors are really searching for alternatives to fiat currency. And pay very close attention to GOLD/EURO as its seems as if the financial community is tiring of Mario Draghi’s jawboning and calling for monetary action. The ECB has been able to satisfy itself on a full dose of sweet talk to keep the bond vigilantes constrained and nothing reveals this better than the Spanish 5-year note is yielding less than the U.S. 5-year note (Spain 1.73% vs versus U.S. 1.74%). This is an illustration of what Jeremy Stein has continuously referred to as the mispricing of risk. The Spanish yields have dropped dramatically even as the amount of Spanish debt has grown. Private sector debt is at 195 percent and public sector debt has grown to a record high 86 percent of GDP.

This represents the belief that the ECB will finance any types of systemic risk that arise. THIS IS THE EPITOME OF MORAL HAZARD and reflects the absurdity of bond prices on a global scale. While investors are chasing a few extra basis points of yield, who knows what risks reside in the portfolios of global investors? (Answer: Only the shadow lenders do!) There is so much mispriced risk in the world relative to the great uncertainties on the geopolitical horizon. Friday’s unemployment data reflected the financial vulnerabilities that exist. SPOOs may be for lovers and GOLD for haters, but for globalists it may actually be resolved through the CERTAINTY OF A LONG TIME-RESPECTED STORE OF VALUE VERSUS THE HAZARDS OF CENTRAL BANK MORAL RELATIVISM.

***More from Japan: The Government Pension Investment Fund (GPIF) said that its “Y22 trillion at the end of last year would be given over to nine new active managers, two of whom would be given a mandate to beat small-cap benchmarks.” The net amount of pension money is less than what the Abe Government would like, though the active nature of the money would provide fund managers the ability to impact the Nikkei and other Japanese stock indexes. PRIME MINISTER ABE would favor a plan where the GPIF sells Japanese bonds and puts more money into risk-based domestic stock assets so as to give some lift to the stagnating economy. The ability of the GPIF asset managers to actively invest in domestic stocks will provide greater volatility to the Nikkei and ultimately lead to a breakdown in correlation of Japan in the risk-on/risk-off algorithmic mix. You have been put on notice.

Tags: Federal Reserve, Gold, gold/euro, gold/yen, Janet Yellen, Japan, Jeremy Stein, moral hazard, NASDAQ, nonfarm payrolls, S&P, Shinzo Abe, U.S. 2/10 Yield Curve, U.S. Dollar

This entry was posted on April 6, 2014 at 4:51 pm and is filed under Currency, Debt Market, ECB, Fed, Gold, Japan, United States. 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.