Notes From Underground: Just a Note Before I Go On Vacation

It’s time to take a few days and recharge the mind. But before saddling up and heading off into the SUNSET here’s a few concepts to consider. Longtime NOTES readers know that the tagline 2+2=5 is a very serious construct for thinking outside the proverbial box. The line comes from Dostoyevsky’s short story, “Notes From Underground” in which the Russian master of literature protests against the RATIONALISTS who pretend to be all-knowing, like the FED MODELS. Just because things appear to be in balance doesn’t mean they are factual, so my goal is to look beyond conventional wisdom and find relevance and profit opportunity in what may appear to be mundane. While I am away new readers to NOTES should look back in the archives to see how we dissected ordinary news to find investment possibilities. The aim is to achieve economic gain through the analysis of politics and economics for the combination of political economy is the main thrust of this BLOG. Now, tomorrow and the FED:

1. The market wants to believe that the YELLEN Fed desires to raise rates before the year is out and is set on September because that is the optimal calendar date. Waiting for December would be Grinch-like and the Fed does not want to prolong the market reaction. The recent housing data (see Santelli interview with Mark Hanson) seems to be a vote against the fed raising rates as does the consumer confidence number released today. However, the recent jobless claims number and signs of rising wages provide fodder for a FED HIKE. The Fed’s speeches have been mixed, with some calling for rate rises sooner rather than later and other notable doves lobbying for a delay in a rate hike.

In MY OPINION the dissonance within the Fed seems to reflect the battle between Yellen and Vice Chairman Stanley Fischer. It was the vice chairman who pushed for removal of the forward guidance language in the FOMC STATEMENT and has hinted at the need to raise rates from the zero bound so as to enable the SOMA to activate a genuine reverse repo/interest on excess reserve policy.

It would be a test of this hypothesis if the FED HELD rates steady through the September meeting and Stanley Fischer resigned as he would have lost the argument. This is conjecture but is what separates the world of NOTES from the predictions of conventional analysts. For as Keynes said: “Worldly wisdom teaches it is better for reputation to fail conventionally than to succeed unconventionally.”

2. Making the call on Yellen’s desired move is the Fed Chair’s favorite barometer, the Labor Market Conditions Index(LMCI), a compilation of 19 variables measuring the health of the job market. Many months ago I questioned the use of the LMCI because it provided the latitude to keep moving the goal posts. Remember when the FED suggested that the full employment goal was 7%,then 6.5% and on and on? Now we are at 5.4% and the Fed has kept policy constant.

Listen for Yellen to discuss the PTER part of the LMCI–part-time for economic reasons–meaning there is far more slack in the labor markets than the traditional index reveals because many people who would like full-time employment do not have enough hours, therefore more slack exists in the real economy. PTER may be the justification for Yellen prevailing over Fischer.

3. If the FED actually does raise the Fed funds rate the YIELD CURVE will become the most important barometer of market sentiment. Today, Richard Bernstein made the point on CNBC that if the Fed raises rates and the yield curve steepens it will signal the Fed is judged to be behind the proverbial curve and will need to be more aggressive in further tightening. But if the curve were to FLATTEN it would indicate the market believed the Fed was premature in raising rates. This has been the argument I have raised in NOTES for the last few years.

This will be especially so because the FED‘s program on new large-scale asset purchases has ended. Any hint in tomorrow’s FOMC statement about a September hike should also have a great impact upon the yield curve. Be patient and let the market do its reaction before becoming too aggressive. The DOLLAR will also get a bid if a September hike is deemed to be closer to reality. Be cautious as we’re in thin summer markets. The closes on Friday will be far more telling then the nano second reactions of the algo headline readers. If the yield curve STEEPENS because of the market sensing no Fed action the equity markets should remain BID. It is not long-end rates that drive the near-term direction of the stock market.

***In tomorrow’s Financial Times there is an article by Peter Spiegel titled, “Let Debtor Nations Exit Euro, Say German Experts” (h/t JB). The five wise men of the German Council of economic experts recommended that, “A permanently uncooperative member state should not be able to threaten the existence of the Euro.” The article says that Chancellor Merkel’s poll ratings rose the tougher her and Mr. Schaeuble reacted to the Greek demands for debt relief. The wise men further note, “To ensure the cohesion of monetary union, we have to recognize that voters in creditor countries are not prepared to finance debtor countries permanently.” Earlier in the week, Italy’s Finance Minister Pier Carlo Padoan suggested in another FT article that there OUGHT to be greater integration in the Eurozone. Particularly, “… completion of a banking union, the establishment of a common eurozone budget and the launch of a common unemployment scheme to reinforce the common currency.”

In direct rebuttal to the Italian, the five wise men rejected the proposals as an attempt to counter Berlin’s emphasis on austerity and tough fiscal rules for eurozone members. In a concluding statement for the push by large debtors for a fiscal union of expediency the German economists warn: “Making the euro area collectively responsible for potential costs without member states giving up any national sovereignty over fiscal and economic policies would, sooner or later, make the currency union more unstable.” This is a direct slap at the French who have wanted the German checkbook without sacrificing sovereignty over its fiscal policies. Europe may be on vacation but the continued fallout from the Greek crisis and Schaeuble’s GREXIT PLAN remains on the boil. If the FED believes the EURO crisis is resolved … Oh, wait, Janet moved the goal posts again.

If anything heats up while I am marinating ice cubes (Art Cashin), I will write a note as being away doesn’t mean removed. If you have any questions or suggestions send them to Enjoy some downtime one and all.

Regards, Yra

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27 Responses to “Notes From Underground: Just a Note Before I Go On Vacation”

  1. John Brady Says:

    A potential Fischer resignation is an interesting angle Yra. With Yellen already have pledged to be a 1-term Chair, with her current term ending January 2017, one has to ponder the signal his resignation would send. My sense would be a USD sale. Nice write-up. JB

  2. an american limey Says:

    First of all have an excellent holiday Y you deserve it for doing all my thinking for me, have a Theakston’s on me. Secondly thank you for mentioning my hero Art, we have read his note for many years and value his insight tremendously, a great man. Thirdly I REALLY enjoyed reading this blog, the analysis of the French and German positions was excellent. Have a great time

  3. KR Says:

    Firmer grip on the putter and accelerate through the stroke. Just a small vacation tip.

  4. Richard H Papp Says:

    Rates have increased already. The 6 month T-Bill auctions for
    3/23/15 sold at 99.9469 and on 7/27/15 at 99.9267
    Yesterday the 6 month T-Bill had a 0.15% yield

  5. ShockedToFindGambling Says:

    Yra- If you look at the labor participation rate for 25-54 year olds, it has ben going straight down since the recovery began..

    How does this mesh with the OK employment numbers?

    • Chicken Says:

      I think not exactly well, b/c the future depends on their employment ($15 McDonalds burger flippers?).

      No rate increase, per Yellen.

  6. crash Says:

    have a great vacation ,enjoy the marinated ice cubes

  7. yra Says:

    shocked–that is part of the uber economy .The age group you cite is saddled with debt for useless degrees that even Obama made note of but recanted after getting pushback from art history majors.I have made this argument for a few years and then look at the fact that boomers are not retiring because of the zero interest rate policies—a well trained worker with deep knowledge of the business going on medicare –maybe employers are not in a hurry to get rid of well trained employees who need income because of depleted earnings on conservative retirement accounts–food for thought

  8. ShockedToFindGambling Says:

    Yra- The labor participation rate is about 82% for 25-54 year olds
    and about 62% for the entire labor force, according to the St. Louis FED.

    So the below 25s and above 54s are doing much worse.

    It has been going straight down for both groups, since the recovery began.

    Something does not add up. All I hear about on CNBC are the strong employment gains.

    If you can’t provide enough jobs for your population during a recovery, what will the next recession look like?

  9. yra Says:

    Shocked –similar to CNBC’s ratings during the best bull market run in my lifetime

  10. Donna Says:

    Have a super great vacation, Yra. You are just the best..along with Santelli of course 🙂

  11. the american limey Says:

    so after the BIG event I am confused. $ weaker yields down and so is gold SO the market is saying no hike in September BUT all the talking heads are saying HIKE. Is this because our glorious leader is taking a well earned holiday? OR are they just “odd” I missed Mr Santelli today so not including him on this

  12. ShockedTo FindGambling Says:

    Limey— 2 Year T Note yields were up but 5 year yields were down yesterday.

    Gold did nothing.

    I would interpret that as the market expecting a tightening soon, but the economy fairly weak, and inflation under control.

  13. the american limey Says:

    thank you for your thoughts Shocked BUT…

    2 year more responsive to short term gold is down not up. As to inflation under control read Authers article to see how close we could be to deflation.

    I am interpreting all this as the market saying becalmed with no wind on the horizon.

    I would STRONGLY urge you to read the Authers column in this weekends FT. In fact I would always recommend reading the FT and not just because I am a limey. So my bet is NO hike in 2015 for all the reasons Authers covers in the article.

  14. ShockedTo FindGambling Says:

    Limey- I was talking about the market response………. not the actual situation. Agree we are close to deflation.

    To me, 5 Year Note rallying on a presumptive tightening is indicative of a weak economy, and bullish gold..

    However, gold performance was very weak on Friday. We are within about 7 dollars of the low close of the past 3 years, after a sharp break.

    Gold and gold miners could not hold an early rally and closed poorly, if slightly up.

    I’m not talking my book. I bought a number of gold miners last week and was expecting a big rally Friday, based on the weak stock market.

    There appears to be tremendous resistance in many gold stocks just above current levels. Look at FNV.

  15. the american limey Says:

    so was I. I was commenting on the juxataposition of the talking heads on CNBC ( NOT our glorious leader OR the beloved Rick) who seemed to be on the side of a Sept hike whereas I could see NOTHING in the market that supported that. Now I trade options and some futures so I believe in EMT augmented with a high level knowledge of macro events ( it’s why I read FT all the time). SO all that said I wouldn’t touch gold or any of the commodities right now and I repeat my advice to read the Authers column in the weekend FT. I am certainly keeping my powder dry until I have a better set of indicators, I’m not even putting on my trusty /es ratio put this week. This is my first real holiday in some time. My thoughts are if the glorious leader is away then the mice should play 🙂

  16. ShockedToFindGambling Says:

    Limey- You’re right.

    Really we shouldn’t be in Gold until it shows something.

    I thought I saw stocks topping, an oversold in Gold, and read that hedge funds were net short Gold for the first time ever.

    So I figured it was worth a shot.

    But the action in Gold and miners has been awful.

    I should have gotten out on Friday, but decided to let it close in new low ground before giving up on it.

  17. the american limey Says:

    Taking a shot is great and I applaud you for it,

    I do it every week because I truly believe that no one knows what will happen next. All I do is to increase my probability of success by using options. I also use futures to give me an idea as to what the market believes is going to happen. I don’t really buy or sell stocks any more, preferring to sell option premium and to consider futures pairs trades, though I am a novice at that approach right now. Right now I am chatting to some hedge funds about an cunning plan I have to marry macro events ( from reading the glorious FT), various expert analysis ( our glorious leader for instance) and the wonders of the latest augmented displays to allow non intrusive capturing of stream of consciousness considerations and the related information triggers that generate them. This is a fancy ( sounds more expensive) way of saying you can capture what you opinion is whilst reading, talking and writing without using a computer. Right now it’s really easy to raise funding thanks to the dullards at the Fed, make hay whilst the sun shines is my motto 🙂

  18. yra Says:

    shocked and dave—nice posts.But as I pondered the post employment trade I became dazed and confused as Santelli noted the move in the yield curves.The 5/30 and 2/10 flattened dramatically on the week and yet the Gold and the Euro both staged rallies on Friday —the 5/30 and 2/10 U.S. curves both closed under the 200 day m.a. in response to a possible Fed move after the so so unemployment report.If the Fed was behind the curve the curve should be steepening even in the face of a September raise in rates —or Santelli points out the curve may be flattening because of over all recent dollar strength and the low commodity prices—the market is trying to tell us something –just don’t know yet as the fog of war waits to clear

  19. ShockedToFindGambling Says:

    Yra- Agree.

    If a 1/4 raise in Fed Funds, which has been talked about ad nauseum, can flatten the yield curve………something is not right.

    • the american limey Says:

      how do you know this is “Yra” he’s on hols 🙂 loose lips sink ships…

  20. the american limey Says:

    who are you? the only Yra I know is on holiday and I am pretty sure he would be pissed at you pretending to be him. In short ( as an Admiral once said to me) if you bite a tiger in the ass you better have a plan for the teeth 🙂
    ANYWAY let’s assume that you are who you say you are and you are looking at the same field of play I am ( who knows what you are looking at when NOT in Chicago as everywhere else is Hobbiton) then I agree that our nanny state fed have screwed up the pitch so badly that all that can be bowled are googlies. Which makes it so much fun for me, lashings of vol,b ark traders managing the desks ( and loading the algos) together with a fed who are having a blast with Wag the dog type press releases. As private parts to the gods are we, they play with us for their sport
    NOW GET BACK TO YOUR HOLIDAY!!!! the mice are playing thank you very much

  21. yra Says:

    heeeeeeeeeeeeeeeessssssssssssssss back–be on with Santelli tomorrow

  22. the american limey Says:

    and the world regresses to the mean. Hope you had a nice holiday and ready to play Winston Smith to the Fed’s Big Brother. Remember he also wanted 2 + 2 = 5 🙂

  23. Competitive Devaluation; Not the Way To Run an Economy Points and Figures Says:

    […] commodities drops.  Gold and Crude Oil were down overnight.  The other day my friend Yra Harris wrote a bit about what he sees going on inside the US […]

  24. GreenAB Says:

    Yra I hope you´re enjoying your vacation.

    “…If anything heats up while I am marinating ice cubes (Art Cashin), I will write a note as being away doesn’t mean removed…”

    i´d love to get your take on CHINA devaluing and it´s consequences?

    to me they look desperate, which means that the world´s largest economy probably is in very bad shape.and could this rather tiny but surprising move finally send euqity markets over the cliff (like James Baker did)?

  25. the american limey Says:

    remember China WERE trying to get out of being an export dependent country and one look at the results of the policy ( I think exports down 8%) AND the Fed might tighten ( taper tantrum) soon ( probably 2016 as they probably have had a chat with China this morning) caused them to panic a smidgen and implement Attack Plan R (always loved that film).

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