Notes From Underground: Three Cheers For the Fed (They Kept Out of the Fray)

It has become standard operating procedure for the FED to enter the market in an effort to minimize the impact of any low probability event with market disrupting outcomes.The BREXIT vote surprised the markets but the FED allowed investors to absorb the financial pain and stayed in the watchtower.

In the previous post, I opined that the financial implications from Brexit were hyped because of fear of the unknown and had no idea that this event was a possibility. The airwaves have been filled with the bloviators expounding with such certainty about events about which they knew little, until the stock markets plummeted. News anchors matched the idiocy as they stood in London streets providing photo backdrops to the “young fascists” protesting to redo the referendum as if it were a tee-ball game or AYSO soccer tournament. Adding angst to entire drama was the predictable behavior from the PLUTOCRATS and Bureaucrats of the EU whose main desire is to punish the British for the audacity to challenge the established order.

The EUROCRATS are attempting to invoke the Greek and Cypriot playbook by threatening the Brits with economic catastrophe as a lesson to any others thinking about departing from the European Union. The most dangerous of all the European bosses is Jean-Claude Juncker. He is threatening the Brits and doing the heavy lifting for German Chancellor Merkel, and, of course, the sniveling, cowering French President Hollande.

In an interview with the German financial daily Handelsblatt, Juncker called it an absurd idea that the currency zone could fail. Juncker went further and made it clear: “We have the instruments of torture in the basement and we’ll show them when it’s necessary.The problem is, when everyone knows that there is this locker full of tools in the eurozone, no one sees the necessity of ambitiously putting his budget in order. So I can only tell you that the tools are there.”

The European nomenklatura are a dangerous, vindictive group but Mr. Juncker fails to realize that Britain’s situation is MUCH different from Greece. First, the Brits have the POUND and of great significance for the U.K. is that British debt is set in its domestic currency so if the POUND depreciates there is no credit hit as it would be for Greece returning to a depreciated drachma. Second, Britain is a long-established financial center with deep connections to the global capital markets. Third, the Brits have the ability to regulate and cut taxes to in order to attract business. British bonds at 1 percent yield are still attractive in a world where Italian 10-year notes have a repressed and contrived 1.4 % yield.

Yes, Brussels can threaten and cajole but London is not Athens. The Brits also have a counterweight to the French and that is the nuclear power plant to be built at the England site of Hinckley Point. This is a monster project for the French firm EDF and with Germany closing its nuclear energy plants, France is in need of all customers in an effort to continue its world-class nuclear energy infrastructure development business. (EDF is 85% owned by the French Government.) Punishing the U.K. will be far more difficult than those nations lacked in to the strictures of the EURO. The markets have begun to realize that this “divorce” will take a great deal of time and be far more complicated than the President Juncker will openly admit.

***While the writ of divorce is filed on the Brexit referendum, the sands of time will keep shifting and politics in many of the other 27 EU nations will continue to complicate the landscape. Time is on the side of the Brits so my advice to London is look to Big Ben. It is easy for Juncker to bully the EU meek but be assured that President Hollande of France will not be pushed by any bureaucrats from Brussels. Add to the potential toxic brew: The face of Vladimir Putin looms from the East as the global “agent provocateur” is smelling the blood of a wounded political entity. There will be no quiet on the Eastern Front.

***The opinion of Larry Summers continues to crowd the media in an effort to push forward a massive global fiscal stimulus program. Professor Summers’ impact is growing as the world leaders are desperately searching for something to still the discontented voices of the global Brexiters. It is time for action and with central banks all tangled up in red,it is time to unveil massive infrastructure programs.

Again, watch the large global engineering corporations as well as their global suppliers. Providing further support to such an effort was the ECB President Draghi’s loud call yesterday for G-20 nations to do more to supplant moribund monetary policy. In my eyeing my massive trading matrix, COPPER is breaking out above the 200-day moving average as we come into quarter and month ends. This may be a meaningless signal but I will pay attention for it is hard to fathom that with all the new stress in the global system–Brexit, China, Japan, European banks, slowing U.S. growth etc.–COPPER IS FINDING SOME STRENGTH. Just an important variable which to be aware.

***The equity markets have rallied strongly this week and the FOOTSIE closed above the high made on June 22, before the Brexit vote. What’s problematic for the Brussels crowd is the large European domestic banks have not regained pre-Brexit prices. In fact, some are down more than 25% since the day of European infamy.The markets are pointing to severe problems looming for the European financial regulators. The British are Going, the British Are Going–small change relative to mounting problems in the European financial realm. Have a GREAT FOURTH OF JULY.

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10 Responses to “Notes From Underground: Three Cheers For the Fed (They Kept Out of the Fray)”

  1. Chicken Says:

    Freedom contagion blossoming, shoving a stick square between the spokes of the 4th Reich. Time to get off the pot.

  2. asherz Says:

    “It has become standard operating procedure for the FED to enter the market in an effort to minimize the impact of any low probability event with market disrupting outcomes. The BREXIT vote surprised the markets but the FED allowed investors to absorb the financial pain and stayed in the watchtower”…..FOR TWO TRADING SESSIONS.
    The SOP for the bankers, especially for a great surprising negative event, is to let the markets get pummeled, like Muhammad Ali putting up his two arms to cover his face and rope-a-dope, and then come back with smash mouth force.
    After hearing from every corner of the elite world that Brexit will collapse the system, with the wrath of the gods bringing down fire and brimstone, after two days the sun came out and the birds are chirping. All is well again and life resumes as it was on June 22.

    Yra, do you doubt that after massive interventions in the bond markets, the universal motto of “whatever it takes” will allow the integrity of the equity markets to remain in place? That ended in 1988 with the formation of the Presidents Group on Financial Markets (PPT).

    No, the third mandate of the Fed, made its appearance again in the last two days. Ultimately fundamentals will be bigger than the Fed, ECB, BOE and BOJ combined, and the dismantling of the EU and ECB will proceed, one exit at a time. Italian 10 year 1.4% silliness will end and all the implications for the sovereigns will be evident. Banks that have been stuffing their coffers with Draghi dreg debt will have explained why the financials have not bounced back like all the others in la-la land.

    • yra Says:

      Asherz–I agree with the analysis.My simple point was that the FED was not out there trying to stand in and promote maestro directed market behavior.Others tried but there was no silver trumpet blowing to remind the investors to move forward—that I applaud and view it as a learning lesson for the Fed Governors.Yes,the ECB held much firepower from its monthly budget for the post-referendum vote but as I wrote all June,that was to be expected.But outside of the ‘vast wasteland promoters’ investors are not foolishly rushing in—-Britain is not being punished nearly as severely as are the European banks stuffing themselves with zero risk weighted assets—-it is not how it ends but when and the Brits are better -off not being a direct part of it.It is like getting out of Lloyds prior to the onset of a great calamity.

  3. Joe Says:

    Yra, great analysis in getting thru the financial news commentary that focuses on the various cults of personalities and broad political labels and mischaracterizations.

    The British decision to Brexit doesn’t guarantee an easy path to growth and prosperity, as fiat devaluation is a bandaid and a poor long term solution rooted in a 45 year old monetary experiment. But at least the British have regained their sovereignty and ability to make their own decisions and decide for themselves where they are going. Having kept the Pound will make it easier, the other major members who will eventually exit will face more complicated logistics. Comparing Britain to Greece is absurd. It almost doesn’t deserve a response. There is a sense of panic among the Eurocrats, and that’s a good thing.

    Regarding copper, could be more proof there still exists plenty of capital in search of a game in an extended ZIRP/NIRP environment. The price action in the grains this year even shows that soft commodities are still attracting a share of play money looking for returns.

  4. Vic Bulzacchelli Says:

    The Brits will be better off cutting the rope the ECB has tied to its members.

    The ECUEUROCRATS are like a mad man standing on the edge of a cliff. Everyone’s first reaction is to try to stop him from falling. But then we realize – he has a rope tied to his waist and ours and when he falls – he is taking us with him.

    The only sane thing to do is cut the rope.

    Best,

    v

  5. Hawaiiilaw Says:

    Yra, as we say in Hawaii “You da bes'”. Another great post.
    J C Juncker was exactly who Farage was addressing when he told the feckless EU “parliament” that “Most of you have never held a real job.” – Junckman went directly from university into a political apprenticeship, according to his Wiki bio.

  6. Arthur Says:

    We need more macro thinkers like you Yra. Thanks!

    Just food for thought… “An 80 Percent Shot Doesn’t Mean Clinton Is A Sure Thing”

    http://fivethirtyeight.com/features/an-80-percent-shot-doesnt-mean-clinton-is-a-sure-thing/?ex_cid=538twitter

  7. Chicken Says:

    Is the FED liquidating their balance sheet into strength? On the flip side, Germany’s hedge fund and pension manager Draghi, is getting them 1% with default (euexit?) risk.

  8. GreenAB Says:

    i agree with Asherz here. the markets action over the last week has intervention written all over it.

    suddenly the S&P and the 10y yield decoupled.

    imo it was not only the FED but coordinated action by all of the major central banks. nobody wants a Lehman like waterfall event. yesterday Reuters ran story how the central bank was monitoring trading desks in real time: http://finance.yahoo.com/news/banks-saw-unprecedented-step-market-171845336.html imo we´re at a critical point. people are openly talking about the loss of faith in politicians and also in institutions like the FED. if the if there´s ever a need to show that the world is alright, then it´s certainly now. mission will be accomplished once we hit new highs in the stock market. but the 10yaea will tell otherwise…

    • Asherz Says:

      GreenAB you got it. But the bankers won’t go down without a fight. They will throw all their remaining tools at the escalating crisis.
      Fiat currency will depreciate drastically relative to precious metals, the ultimate safest of havens.

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