Notes From Underground: For What It’s Worth (My View on Tomorrow)

There’s Something happening here
What It is ain’t exactly clear
there’s a man with a gun over there

Telling me I got to beware
There’s battle lines being drawn
Nobody’s right if everybody’s wrong
Young people speaking their minds
Getting so much resistance from behind
What a field-day for the heat
A thousand people in the street
Singing songs and carrying signs
Mostly say, hooray for our side
Paranoia strikes deep
Into your life it will creep It starts when you’re always afraid
You step out of line, the man come and take you away
It’s time we stop ,hey what’s that sound
Everybody look what’s going down

Stephen Stills wrote these words almost 50 years ago and it certainly applies to all the noise and opinion filling the media about a possible 25 basis point increase in the FED FUNDS RATE. The financial press has made tomorrow’s FOMC statement and Yellen press conference into a mania almost as great as the FACEBOOK IPO. Everybody who is anybody has an opinion about what the FED OUGHT TO DO.

At Jackson Hole, demonstrators showed up protesting a FED HIKE and yet in recent PEW research 90 percent of those polled could not identify the FED Chair. Today, more was heard from the NO RAISE corner as Larry Summers had an op-ed piece in the Washington Post and even Wallace Shawn (or was that Lloyd Blankfein) stated his opinion against an early move by the FED. Of course it would be INCONCEIVABLE for the CEO of Goldman Sachs to offer an opinion opposite of his chief economist, Jan Hatzius. It is INCONCEIVABLE that Blankfein would even venture into this mess by staking out a position in the Great Debate.

For what it’s worth, I side with James Grant and believe that the FED WILL RAISE RATES. While I differ in my reasoning for the rate rise, I do understand Grant’s views. My take is one that I voiced months ago. The FED needs to raise rates in order to put the mechanism of reverse repos and IOER to work. The balance sheet is huge and while the Fed has been testing the O/N RRP operation since September 2013, it is time to put the theory into practice on a much grander scale. IF THE FED DOES RAISE I WOULD LOOK FOR CHAIR YELLEN TO BE UBER DOVISH AT THE PRESS CONFERENCE. ALMOST LOOK FOR HER TO PRONOUNCE A ONE AND DONE FOR AN EXTENDED PERIOD. I caution not to be the first to trade on the FOMC statement and see how the press conference unfolds. IF the Fed raises watch to see the following:

1. Support levels that hold in the SPOOS;

2. How the DOLLAR trades, especially now that we have closed above the 200-day moving in the YEN, EURO and POUND;

3. Precious metals had a large rally today, which I attribute to short covering as I do the rally in emerging market currencies and the EURO, Swiss and Pound. The currencies all have been in short-covering mode amid fear of a Fed rate rise. As noted before, the precious metals had some short covering today but the way they perform after a FED rate rise will be very important. Larry Summers maintains that the Fed’s credibility is not at stake if they do not raise rates but I side with Ben Hunt and believe the OMNIPOTENCE OF ALL CENTRAL BANKS IS BEING CALLED INTO QUESTION. If the FED RAISES and the Yellen press conference is UBER DOVISH, look for the GOLD to provide proof to my line of reasoning (but I advise patience);

4. The BONDS have been sold hard during the last few days but the selling has taken place all along the yield curve so nothing really telling by movement in the curves. IF THE FED RAISES AND THE CURVES BEGIN TO STEEPEN BY FRIDAY AFTERNOON IT WILL SIGNAL THAT THE MARKET WAS ANTICIPATING A POSSIBLE ONE AND DONE. You must be very patient with yield curve scenario. If it begins to steepen by Friday afternoon–especially the 2/10, which is hovering by its 200-day moving average and has not closed above (meaning renewed steepening) in about six weeks. Today the 2/10 200-day moving average was 149.05, according to Bloomberg, with the curve settling at 148.6 basis points.

While I usually would be a first responder I will let the ALGOS do their work and wait for FORWARD GUIDANCE from Chair Yellen … FOR WHAT IT’S WORTH.

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18 Responses to “Notes From Underground: For What It’s Worth (My View on Tomorrow)”

  1. the american limey Says:

    I’m waiting to see what Asia and Europe do. My “hope” is that if the fed raise rates the spoos will dip (1830) and the tina trade will kick in with a slow trend upwards back to 2100 (spx) jan 2016.

  2. Hypr Says:

    Raise the rates 50 basis points, does anyone remember when you could count on your savings when you got a bit older and you could use those funds to spend without using all your savings. That is one thing the Fed will not talk about. Give the old timers a break. If the stocks can’t take a Fed Fund rate of 75 basis points, then this is might be a huge charade!

  3. jromeo21 Says:

    Well said. I have always enjoyed reading you’re take on markets. I havent a clue what the Fed will do tomorrow, but feel they need to do something, and a 25 basis points would be a good start.

  4. kevinwaspi Says:

    I love the Stephen Stills reference, a good summary of the ridiculous noise over the Fed. I have another suggested song of reference:
    The 1970 Temptations (written by Norman Whitfield and Barrett Strong) “Ball of Confusion (That’s What the World is Today)”
    Courtesy of central bank omnipotence, markets (the world) have been castrated of any real signaling power, and now become the temper tantrum act-outs of spoiled three-year olds. Absent any real information, they provide nothing but meaningless discourse on the “will she or won’t she, only her hairdresser knows for sure” 25 basis point “liftoff”. Like pitching pennies to waste time, it’s a pastime in an otherwise nothing to do world.

    So, that’s what the world is today hey, hey……
    Great Googamooga
    Can’t you hear me talking to you?

    It’s a ball of confusion
    That’s what the world is today, hey, hey
    Let me hear ya, let me hear ya, let me hear ya

    Sayin’ ball of confusion
    That’s what the world is today, hey, hey
    Let me hear ya, let me hear ya
    Let me hear ya, let me hear ya, let me hear ya
    Sayin’ ball of confusion

  5. Hypr Says:

    By the way, I am not bored yet, but does anyone remember when the long bond was the called the %14 of 11-11?

  6. yra Says:

    Hypr–yes you are bored –but I can’t hear you calling out the 14% of 11-11 because maury Levy is screaming in my ear

  7. ShockedToFindGambling Says:

    Yra- Agree the FED will tighten.

    The market is set up for it, and by far the greater risk for the FED to look weaker and more indecisive than they already look.

    If you are bullish something, my guess is that you can buy it if their is a good break on a tightening.

    I could be wrong.

  8. Mario D Says:

    Let the changes begin I agree. Keep face alongside many other variables will create the RAISE. The reality is a macro picture as it is a day in history once again as we had made it. Lets see what comes of it.

  9. Rob Syp Says:

    What do we do now?

  10. yra Says:

    rob–as I have noted .It is now a fed credibility issue and the markets are nervous.But have not seen enough to get HEAVILY involved.But YELLEN WAS WRONG ON THE DOLLAR YESTERDAY FOR SINCE THE JULY 29th meeting the DOLLAR WAS ALREADY DOWN 3 percent–so she was totally wrong on that transitory variable

  11. Chicken Says:

    Yra is the best, really appreciate him sharing his thoughts! 🙂

  12. Chicken Says:

    Wallace Shawn: ‘I live off doing animal voices in cartoons’ is an actor, so that went over my head (perhaps I’m ill-informed).

  13. yra Says:

    Chicken–watch the Princess Bride

  14. Rob Syp Says:

    His next film after Princess Bride was The Moderns, an Alan Rudolph direct – Mark Isham soundtrack (outstanding music) an art caper film noir set in Paris 1920’s.

  15. Rob Syp Says:

    The Moderns (final scene)

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