Notes From Underground

It takes a BOURGEOIS APOLOGIST to point out the limitations of our thought processes. The current financial world is seen through the prism of BREXIT. Every nuance from the pollsters result in magnified market reactions. Last week’s political assassination of a sitting member of Parliament brought the political establishment to halt campaigning and caused a national contemplation as to where England was headed. The look into the British psyche, according to the “new” polls, has brought the voters to find favor in the status quo–exactly what Geoffrey Gundlach had predicted several weeks ago (SEE NOTES POST, IF I WAS A RICH MAN). Yra’s first law: Money is fascist and always seeks the highest return in a hoped for stable regime. Political assassination leans the ship of state toward the LEEWARD side, but there are three days left and many new polls to provide volatility to the markets. But I caution there are other events in the world that are of more than of a passing interest.

1. Is the one-dimensional nature of financial thought so parochial that it failed to raise the issue of the FOMC vote being a unanimous 10-0? I cautioned in my pre-FOMC analysis that the vote would be the most critical part of the entire statement. If any of the so-called hawks had backbone to support their recent musings about the robust U.S. economy, the vote OUGHT to have been 7-3. But it raises the issue that the previous lone dissenter to ultra-accommodative, Esther George, surrendered her dissent and voted to maintain the current rate policy. The question for the markets is why did Esther George change her hawkish vote? In my ruminating over this I came to the POSSIBLE idea that President George reacted to the recent data from her Kansas City FED of the KC LABOR MARKET CONDITIONS INDEX.

This is the aggregated data of Chair Yellen’s famous 19 variable dashboard of labor conditions. This chart has stalled out and the recent drop in the LMCI questions the strength of the unemployment rate. It is treating the gain in jobs as lacking any sort of breath and pointing to rising slack and thus downward pressure on wages.J ames Bullard’s about-face on the U.S. economy garnered the press headlines but the real question is what prompted Esther George to change her dissent. Brexit receives all the headlines but once the BRITISH REFERENDUM is past the focus should be directed toward FED credibility. In this sense, GOLD’s failure to get trashed today was probably a result of the market’s fear of the FED‘s inability to sustain a coherent policy. President Esther George did not “conceal” her feelings but the financial media failed to ask the obvious question.

2. If you think BREXIT is important you are correct but I advise that tomorrow’s decision from the German Constitutional Court (GCC) could be more market moving then the British electorate. The German Court in Karlsruhe will again revisit a complaint filed by a petition to the High Court to decide the constitutionality of the OMT (outright monetary purchases), the backbone of the ECB‘s quantitative easing (QE) operation. The GCC has previously heard such a petition but passed the decision onto the European Court of Justice to determine if the ECB was acting within its LEGAL MANDATE. The Draghi plan was deemed by the European Court of Justice (ECJ )to be a measure to meet the ECB inflation mandate but the German antagonists are again petitioning the Court on the issue of the purchases of European sovereign debt being an act of fiscal policy.

There’s an article in tomorrow’s Financial Times titled, “German High Court to Rule on Legality of the ECB Financial Weapon.” Reporter Claire Jones writes: “The crux of the program is a pledge to buy eurozone government bonds in potentially unlimited quantities to counteract any sharp rise in borrowing costs for eurozone governments.” The issue facing the COURT is further illuminated by Carsten Nickel of Teneo Intelligence: “A key question has been whether due to Berlin’s guarantee for the Bundesbank’s balance sheet, an ECB decision for national central banks to buy bonds under OMT ultimately constitutes a decision about Germany’s budget. According to the German Basic Law,only the Bundestag is empowered to take budgetary decisions.”

ECB President Draghi has sped up the bond purchases in an effort to place more responsibility upon the German credit card. The initial program put forward by Mario Draghi presented the concept of conditionalities that all potential users of OMT would have to meet in order to gain access to the ECB. The current QE program has no such constraints. It is doubtful that the GCC will rule in favor of the petitioners and call the OMT illegal but in this time of tumultuous politics it is another issue of consequence for owners of European sovereign debt. We are not one-dimensional at Notes From Underground, where 2+2=5 is a beautiful thing.

Tags: Brexit, ECB, Esther George, FOMC, James Bullard, Janet Yellen, Mario Draghi, OMT, QE

This entry was posted on June 20, 2016 at 9:09 pm and is filed under ECB, Fed, UK. 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.