The four living Fed chairmen have gathered in New York for a panel discussion for International House. News Flash: The discussion was disappointing as the moderator had too much censoring power at his discretion about who would answer the audience questions. Paul Volcker had a great response regarding concerns about the Chinese yuan replacing the dollar as the world’s key reserve currency. Volcker said if the U.S. would qualitatively deal with its responsibilities it was not a concern but would probably represent the Chinese becoming a real open economy. Also, Greenspan let it be known that the dual mandate is a nice talking point but the reality is that the FED does not make decisions in a vacuum. After Greenspan’s answer Yellen basically agreed. The moderator should have allowed Yellen to answer first since she is the sitting Fed Chair. Allowing Greenspan to answer first diminished Yellen’s response. Overall, the discussion was … meh.
It has proven to be that Sir Alan was himself the purist form of a Moral Hazard. My contempt for Greenspan and Bernanke is great, especially for his QE2 and QE3. QE1 was necessary to prevent a mass liquidation of all asset classes but Bernanke never seemed to know when enough was enough. It is the Bernanke model that has paved the way for the BOJ and ECB to take the Bernanke model to a RIDICULOUS level of liquidity creation.
In yesterday’s blog, I ASKED THE QUESTION: WHO GUARANTEES THE ECB? It seems others were asking the question today as the 10-year yields in Spain, Italy and Portugal all spiked higher by at least 10 basis points while 10-year yields in Germany and France actually dropped. Germany I understand, but the idea of French yields mirroring Germany’s is another example of the idiocy of global finance. France is economically weak and politically a potential disaster and thus the extra 35 basis points for purchasing French OATS will prove disastrous. The chart on the differential between German bunds and French oats shows the 200-day differential in yield comes in at 35.19 basis points. It closed right there as the differential threatens to break out above a long period of consolidation.
Be cognizant of the markets’ laziness as the ECB’s massive QE program has created a complacency and the desire for yield has kept markets from pricing in political risk. When the global financial world was very concerned about systemic political risk in Europe during July 2012, Spanish and Italian 10-year yields were well above 6%. The current threat of BREXIT is not for the U.K. but rather for Europe as a referendum in Britain will prove CONTAGIOUS for many other nation states in the EU.
Yesterday, the Dutch held a referendum on the EU’s Ukraine treaty and the vote was overwhelming opposed to the agreement crafted by the Brussels Eurocrats. The media portrayed the Dutch vote a result of low turnout and an issue that proved too difficult for the common man to understand. The end result is that it will further strengthen the BREXIT vote. I am beginning too think that the political idiot Cameron will try to cancel the referendum. Again, the great amount of global political uncertainty is not being priced into markets and this OUGHT to be on all our radar screens. Discretionary global macro trading is where profits are to be mined in the AGE OF UNCERTAINTY.
***Yesterday’s FOMC minutes didn’t reveal any surprises but confirmed last week’s thoughts that Yellen’s speech at the Economic Club of New York was her putting her seal upon the FOMC as being her FED. The regional presidents may give hawkish speeches but until Yellen suffers a split vote at an FOMC meeting, the Fed chair holds sway regardless of the noise that fills the airwaves. Yellen sits at the head of the FOMC like SHIVA wielding a TRIDENT. The dual mandate has been replaced by a new variable: global economic and financial headwinds. Yellen mentioned international developments and the dollar nine times in her New York speech and in reading the FOMC minutes several members noted the importance on international concerns, which just don’t know who they members are but it seems obvious that it was the Yellen group of governors that held sway.
For Yellen it is Nehru and not Nairu as globalization continues to keep U.S. wages stagnant. The FED chair appears to be very aware of the political landscape propelling voters for the anti-establishment candidates. It is the lack of wage growth that has promoted the Middle Class to raise its voice to the status quo promoted by the Wall Street crowd. If the yield curves would begin to steepen we would have another solid indicator for this theory. (To read a solid report on the FOMC minutes, I suggest the annotated release from Bloomberg News.)
***Something critical to watch: The Euro/Swiss currency cross weakened today (euro is weaker than Swiss franc) and tested the 200-day moving average at 1.0850 amid concerns about the Italian banks, and, of course the drop in Deutsche Bank stock pushed European savers into the safe haven of Switzerland. The EUR/CHF cross held as it appeared that the SNB was defending the 200-day m.a. This is something to be aware of as the Dutch referendum vote gave rise to an uneasy feeling in European markets. In the FT it is reported that Thierry Baudet, who led the campaign against the Ukraine Treaty and thus the referendum said the idea was “… sparked by David Cameron’s referendum.” Further, Baudet noted: “The point was we want the same as Britain. We want a renegotiation,and a referendum.”
Putin is laughing in the Kremlin while the “democrats” in Brussels are wondering how they will crush the desires of electors. BREXIT is about far more than Britain and Chancellor Merkel wonders when the Bavarian Burghers will man the barricades of direct democracy. It is a good thing I advised the CME Group to keep the Deutsche mark on the shelf when I was a director. Bunds or oats, I will not be placated by a mere 35 basis points even for a little more capital appreciation in the near term. It is the TROIKA of the Apocalypse for the discussion has shifted across the pond: IMF, European Commission and Draghi’s ECB.