Notes From Underground

*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.

Tags: 5/30 curve, Fed, Fed Funds, FOMC, Janet Yellen, Potash, Stanley Fischer, U.S. Dollar, William Dudley, yield curve

This entry was posted on May 18, 2016 at 6:31 pm and is filed under Fed. 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.