Notes From Underground

Jim Bullard? Now There Is An Unsavory Chap

Today was not like the other days for the break in the equity markets came early. As all the global markets were in sell mode St. Louis Fed President James Bullard hit the airwaves with thoughts about being wrong in his inflation projections. It appears that the selloff in crude oil is providing the Fed hawk with concerns that the SUMMARY of ECONOMIC PROJECTIONS may be softer than the December FOMC meeting revealed. Bullard sounded as if he would not be in favor of the Fed raising rates because of the inflation rate turning away from the spurious 2 percent mandate. The unsavoriness of Bullard’s comment is not that he fears a downturn in inflation, and maybe lower growth, but that Bullard seemed to find his DOVISH posture as the U.S. markets were heading toward the August lows. Bullard in unsavory because he called out CNBC’s Jim Cramer for “cheerleading for low rates twenty-four hours a day.”

Bullard used the CNBC platform on September 21 to single out Cramer for pushing the Fed to permanently keep rates low so as to elevate stock prices. It is the FED President who acts unsavory for he comes out and contradicts the recent speech of Vice Chair Stanley Fischer who proclaimed that four rate rises were still in the ballpark. This was not the first time that Bullard has done an about-face on his hawkish posturing. Bullard made his comments concerning the Fed reconsidering prolonging QE during the stock market rout on October 16, 2014. He turned the rout into a rally. It is unsavory for Mr. Bullard to accuse others of cheerleading for it seems his well-timed verbal interventions makes me wonder if he is vying for the New York Fed Presidency. I wish they would all just learn to stick to the narrative as the verbal interventions are merely volatility machines.

***The Bank of England met today and left its QE and interest rates unchanged. This was no surprise as BOE Governor Mark Carney is being very cautious since he doesn’t want to create more uncertainty with a critical referendum on the horizon. Also,the BOE would prefer a weakened POUND as it seems growth and inflation are both softening in the U.K. No need to raise rates until the European Central Bank reveals what its plans are, especially with German Chancellor Merkel under political pressure. The weakened Merkel cannot provide the political cover for ECB President Draghi and with the AfD party in Germany increasing its standing in the polls, the ECB will be more reticent to raise the ire of Bundesbank President Jens Weidmann. Governor Carney is correct in remaining  cautious.

***In the SPOO collapse on Wednesday, the 2/10 yield curve closed under the frequently cited 117.25 positive slope support level. But as I always remind my readers, the longer-term levels are tradeable on a short-term basis but the Friday closes are much more significant. With a strong rally in the SPOOS, DOW, NASDAQ, DAX, NIKKEI came a curve steepening and today it closed back over the 120. The increase in volatility across the entire asset spectrum means that everything is viewed through the prism of a trade until there is WEEKLY OR MONTHLY closing confirmation. In several comments on the BLOG this week I answered questions in reference to the 2/10 curve and noted that the 117 level is important and the great test for the Fed will be when the 2/10 flattens to the positive 80-85 area.

I went back 20 years and saw the critical nature of monthly support. It is there where the FED will have to respond to any fear of an economic downturn signaled by curve flattening. We have never experienced this at the ZERO BOUND because almost all curve flattening takes place when the FED is in the midst of a rate rising cycle. When the 2/10 inverted in 2006 it was during a period of rate increases as the housing bubble was signaling danger. Again, we are in unconventional territory with the curve flattening at the zero bound.

***Just to put on the radar screen: The Saudi’s trial balloon of floating the stock of its national oil company, Aramco, is interesting from several perspectives:

1. Keeps Saudis in the western camp as  the possibility of the largest IPO ever will secure the Kingdom’s protection. Could U.S. and developed stock markets absorb the demise of a $10 trillion company without undermining the entire financial system?

2. If the Saudis cut production it will be done under the guise of enhancing shareholder value for if they failed to work for shareholders they might be sued by the SEC or else be challenged for a seat by some activist;

3. Provides for a massive capital infusion and equity is cheaper than going to the bond market. I know some are arguing that the IPO will never happen because it will require too much public disclosure of the Saudi’s oil reserves but I would advise checking through some of the Chinese corporations listed in the U.S.; and

4. It will necessitate the western powers maintaining security for the Kingdom. The Saudis are nervous as they are being squeezed by the Iranians and ISIS is a problem. It is my opinion that ISIS eyes Saudi Arabia as the crown jewel of a CALIPHATE because it controls the religious centers of Mecca and Medina. If the Saudi’s are a major part of investor portfolios the western governments will be guardians of the Monarchy. There are many facets to the idea of an Aramco IPO that, from a global macro perspective, very intriguing.

Tags: BOE, DAX, Dow, Fed, inflation, James Bullard, Mark Carney, NASDAQ, Nikkei, Saudi Arabia, SPS, U.S. 2/10 curve

This entry was posted on January 14, 2016 at 5:01 pm and is filed under Equity, Fed, Uncategorized. 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.