Notes From Underground: *Uncle Charlie Makes the Fed Like Michael Jordan … Can’t Hit the Curve

*NOTE: Uncle Charlie is baseball slang for curve ball

Today, the markets validated the recent moves in the YIELD CURVES as the April FOMC minutes reflected a desire by MOST participants to raise in interest rates at the JUNE meeting (kudos to Mr. Art Cashin for presciently discussing the importance of “MOST” prior to the FOMC release, or if you prefer LEAKS). It appears that the “data dependent” FED is certainly prepared to raise the FED FUNDS rate (in addition to the lower-bound reverse repo rate, and upper-bound interest on excess reserves rate) as long as the data is robust enough to signal full employment and is having the desired effect on wage and overall price inflation. The minutes certainly reflect the hawkishness of Rosengren, Mester and Lacker but it begs the question: DOES MONEY TALK AND BULLSHIT WALK? For as hawkish as the April minutes have been defined by the previous five days of price action, HOW COULD THE VOTE HAVE BEEN 9-1 in favor of keeping rates unchanged?

The flattening in the 5/30 part of the curve continued today but something else appeared, which is counter intuitive. IF THE CURVE IS FLATTENING IT IS NOT A POSITIVE FOR BANK STOCKS FOR BANKS BORROW SHORT AND LEND LONG. A flatter curve implies that the banks will be paying more for funds while receiving less on money lent for a longer duration. When the FED was projected to raise rates at the March 16 meeting the 5/30 curve had made a LOW of 118.5 basis points. If the market thinks the FED will raise that level should be tested but the move in the bank stocks today suggests otherwise. It’s an indicator to watch for a one and done FED. The FED cannot hit the curve correctly as the recent flattening suggest one of two things: Either economic activity is projected to slow in the next nine months or the ECB and the BOJ have turned the entire globe into a bond bubble based on relative value, which infers that every asset in the world is mispriced. The answer may be a mixture of both.

There is no question that the ECB has become the most disruptive force in global credit markets as its buying of 20 billion euros a week in various credit instruments is wreaking havoc and distorting prices. And that is not a counterfactual. The bottom line is that if the FED is misreading the economic indicators and raises rates it may cause a collapse in the yield curves. Michael Jordan is one of the greatest athletes ever and he couldn’t hit the curve, which may leave Janet Yellen in a league of her own.

Tomorrow we will hear from some FOMC Governors, Stanley Fischer and William Dudley. Fischer first propagated the notion in January that four rate increases were in the ballpark for 2016 so let’s see how hawkish he is. If Fischer is somewhat dovish, the short-end of the yield curve will get a boost. NY FED President Dudley’s words will also carry weight. Dudley has been a shield for Yellen’s views so if he is dovish it will mean that the Fed Chair remains reticent of a rate rise and will cautiously await for all headwinds to diminish.

***The markets’ response to the minutes were fairly sane: THE DOLLAR STRENGTHENED, PRECIOUS METALS WERE AGGRESSIVELY SOLD AND MOST IMPORTANT THE EMERGING MARKET CURRENCIES WERE SLAMMED. The emerging markets may be the focus for Janet Yellen if she wants to keep the FED funds rate in the 25-50 basis point range. The emerging markets are borrowed in DOLLARS so a rally in the dollar caused by an increase in interest rates will create a negative hit on the EM economies. I know the LAW reads DUAL MANDATE but as the banker to the world the FED‘s mandate seems malleable on demand. As Michael Pettis has long argued, The DOLLAR MAY BE AN EXORBITANT BURDEN RATHER THAN A PRIVILEGE and it that holds Jane Yellen is certainly burdened. I know what the Fed presidents think but what doth the Chair say?

***An open suggestion to the Chinese Sovereign Wealth Fund: It seems the Chinese are scouring the globe for investment opportunities. Last week the Germans announced an interest in buying the giant agricultural concern Monsanto. No matter how boring the companies may be food and water are the preeminent concerns of 99% of the world’s population (the 1% can live on virtual nutrients provided by the newest silicon) and the one place the Chinese and Indians have had a continual impact on prices is FOOD. The grain supply/demand curve has been bent upward as the recent lows in the soyabeans at $8.50 reflected a bear market. Based on huge supply it would have taken the market to a $4.00 handle two decades ago. The world’s increased demand for protein makes the purchase of fertilizers and other agricultural inputs a mandatory requirement for CHINA. Statistically the Chinese use 30% of the world’s fertilizers. I am buying POTASH as a speculative play on the needs of the Chinese.

In 2010 BHP attempted to buy POTASH but the Canadian government blocked the $40 billion offer and that was with the Canadian dollar trading at PAR to the U.S. dollar. Today, POTASH’s market cap is $14 billion and the Canadian dollar is trading 25 percent lower. Sometimes 2+2=4. I advise doing your own in-depth analysis but the agriculture companies are a very interesting place for the Chinese to shop. Like Ken Kesey: IT’S SOMETIMES A GREAT NOTION, but notions do not always result in profits.

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13 Responses to “Notes From Underground: *Uncle Charlie Makes the Fed Like Michael Jordan … Can’t Hit the Curve”

  1. nrbw92@ameritech.net Says:

    Excellent “Notes”. Thanks Yman! Norbo

  2. Asherz Says:

    In the past Fed chairmen have said that you can’t tell a bubble until after the event… unless it is so obvious as it is today. Q1 earnings down 7% with revenues also down with equity markets near all time highs. Sovereigns around the world are in deep doo doo from Greece to China to Brazil to Portugal to a US with $20T in debt (and a 1% rate rise would put a $200B rap on the budget and leading to trillion dollar deficits.) So jaw bone again or as you colorfully put it BS walks. The bond bubble is even bigger (who guarantees the ECB, BOJ and yes, the Fed). So the need to take some air out of the bubble for several reasons. Gold’s investment demand must also be cooled (the kryptonite to the nutty QE experiment).
    Air Jordans didn’t help on the diamond despite Michael’s natural talents. Ben and Janet’s economic theories sounded good in the classroom but are striking out in the marketplace.

  3. Frank C. Says:

    Bill Gross, M. El Erian and Jan Hiatzius all in recent days had said June was not out of the question for a raise. These guys sure knew what was in those April minutes. No question that the whisper campaign / leak was to give big market players a heads up, so it does not come as a surprise in June.

    (
    I have to admit that today’s announcement was out of left field, especially based on the weak unemployment figure last month.

    Is Janet swinging late? Or is this a turning point in conceding QE and ZIRP didn’t work?

    Did Bill Gross have it right when he tweeted today that “So the FED sort of gets it. Low rates destroy business models and sap economic potential.”

  4. Rob Syp Says:

    With the anemic growth in USA and world at what point does the TSA situation shave something off GDP here?

    I tried flying out of Midway on Tuesday arrived late (something prevented an early arrival) and while waiting in line just decided to turn around and leave.

    The effect of that has me not staying in a hotel for 2 nights, car rental, meals, tips etc. the Southwest ticket will be used for a later date.

  5. Chicken Says:

    Yra, great perspective.

  6. Chicken Says:

    Sure enough, it appears bank bulls are being flattened.

  7. Joe Says:

    “DOES MONEY TALK AND BULLSHIT WALK? For as hawkish as the April minutes have been defined by the previous five days of price action, HOW COULD THE VOTE HAVE BEEN 9-1 in favor of keeping rates unchanged?”

    Indeed. Act on what they DO, not what they SAY. Just the opposite of what the late great press secretary Earl Bush implored his press peers to do regarding the utterances of his Boss, the late Mayor Richard J. Daley: “Guys, guys! Print what he MEANS to say, NOT what he says.”

    Re “the LAW reads DUAL MANDATE but as the banker to the world the FED‘s mandate seems malleable on demand.”

    And they’ll never admit it as the Dual Mandate is the chair’s Trump Card used in congressional testimony whenever an excuse is needed to deflect responsibility for policy mistakes.

  8. ShockedToFindGambling Says:

    Yra- I believe most bank loans (other than mortgages which are mostly sold to Fannie/Freddie) reset every 3 months based on 3 month Libor.

    So when you talk about a steeping yield curve, are you talking about the spread of overnight money to 3 month Libor?

    My guess is that some of the bank stocks are weak, due mainly due to bad legacy loans and increased front-running competition.

    • yra Says:

      Shocked–you may be correct on the legacy loans but the profits from the surfing the curve for banks in an ultra low rate environment will keep the large bank profits down—now it is another support to the community and regionals as you point out

  9. Chicken Says:

    Looks like S&P needs to trade back down to avoid a debilitating rate hike?

  10. 5.19.16 – morgan street report Says:

    […] sectors. As Yra Harris pointed out today (thanks for retweeting it Anthony Crudele!) on “Notes from the Underground“, a flattening yield curve is negative for banks which borrow short-term and lend long-term. […]

  11. Chicken Says:

    2+2= something far less than 3, based on my comprehension of standard old-school fiction-peddling math….
    http://money.cnn.com/2016/05/20/retirement/central-states-pension-fund/index.html?iid=hp-stack-dom

  12. Chicken Says:

    Buzz saw Williams out shorting again today. hoping to see markets trade down and pining for another magnificent401K crash?

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