Notes From Underground: Cleaning Up the Disinformation Of the Brexit Vote

Some quick hitters before getting to work on the implications of Friday’s employment report.

***Before the Brexit vote, Monty Python member John Cleese opined in the Daily Mail that he was voting to leave because Britain was swimming upstream in its efforts at reforming the EU. He suggested the best way to foster change in Brussels was to kill Jean-Claude Juncker. This is a harsh assessment, but I suppose Kevin Klein would be up for the job.

***On July 1, CNBC’s Sara Eisen interviewed Fed Vice Chair Stanley Fischer. It was a milquetoast interview in which the questions were bland and the “answers” even less insightful. Ms. Eisen did ask Mr. Fischer if the “DOLLAR IS A CONSIDERATION RIGHT NOW IN TERMS OF RAISING RATES INTO WHAT IS A GLOBAL PERIOD OF UNCERTAINTY AND STABILITY AND GLOBAL EASING?” Fischer’s answer was probably a faux pas:
“You know, we have to take a whole host of things into account. The dollar is actually weaker than it was at the beginning of the year. It has–it strengthened remarkably. Well not even remarkably. It strengthened after the Brexit vote and it’s coming–it’s come back a bit and its very hard to predict the exchange rate, THOUGH WE TAKE IT INTO ACCOUNT.”
The emphasis is mine and it is something that we should watch for because it is not the FED‘s bailiwick to be concerned about the dollar. Post Brexit, the DOLLAR HAS RALLIED ALMOST 4% versus a basket of currencies so this will keep the FED cautious even with a strong JOBS report on Friday. The current 200-day moving average on the Dollar Index is 96.52 with today’s close at 96.06. More importantly, the DOLLAR has rallied against most foreign currencies but has weakened versus the YEN, indicating the significant rally against the POUND and EURO. With interest rates on sovereign debt being pushed to record lows in all the developed economies, positive yield on U.S. debt is pushing global pension funds and insurance companies into U.S. stocks and bonds. In the land of the blind, the one-eyed man is king.
***The yield curves in the U.S. debt market are approaching critical levels. I have written for two years that the 2/10 U.S. curve would need to hold a positive 75  basis points or the FED would be in a difficult situation. Flattening curves are indicative of money being too tight and danger ahead. How will the FED react to a flat curve during a ZIRP period? There is little room to cut rates if the U.S. economy begins to slow and the question for us will be about the FOMC‘s urge to panic. The ECB has certainly created an anomalous global debt situation in which its negative interest rate policy has created a demand for anything liquid and a positive yield. The free flow of global capital results in the crush of interest rates regardless of a nation’s monetary policy. The U.S. curve is certainly flattening in response to the ECB‘s massive stimulus program. What is the FED to do? This will be the question as we confront the paradox of lower long-term rates in the strongest growing developed economy. Back to the Yellen conundrum.
***There was blog post by Larry Summers after the Brexit vote titled, “Why Brexit is Worse For Europe Than Britain.” The post was directed toward the global elites who have failed to comprehend the great angst from citizens of many nations suffering under the wage pressure of globalization. In a clarion call to the Davos crowd is to:
“… develop a ‘RESPONSIBLE NATIONALISM‘. It is clear there is a hunger on the part of electorates, if not the Davos set within countries, for approaches to policy that privilege local interests and local people over more cosmopolitan concerns. Channeling this hunger constructively rather than destructively is the challenge for the next decade. We now know that neither denying the hunger, or explaining that it is based on fallacy is a viable strategy.”
This is important for it lays the intellectual rational for embarking a massive fiscal stimulus. The operative phrase for promoting massive government infrastructure projects is “responsible nationalism.” Summers is pushing for a major position in the coming new administration. Our job will be to discern the best ways to play a global public investment era (h/t Chris M. and Kevin M.).

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12 Responses to “Notes From Underground: Cleaning Up the Disinformation Of the Brexit Vote”

  1. asherz Says:

    “The yield curves in the U.S. debt market are approaching critical levels. I have written for two years that the 2/10 U.S. curve would need to hold a positive 75 basis points or the FED would be in a difficult situation. Flattening curves are indicative of money being too tight and danger ahead. ”
    Yra- Wasn’t your Maginot line in the recent past 115 basis points? Of course we smashed through that to where we are now.
    With negative yields proliferating the risk off money is swarming to our shores. The Titanic is sinking and everyone is trying to get into the lifeboats. The incredibly flattening yield is heading towards inversion and you know what that means. Even at these levels it seems that Alea iacta est (the die has been cast) . However Mario and Janet, the financial Caesar’s of our day, have already crossed their Rubicon.

    • yra Says:

      Asherz–115 was the short term level but I advised once that went that 75 would be the big level for the Fed—-now I am very aware of the impact from the ECB ‘s activity but even the fed minutes noted a concern about the flattening 2/10 curve—will find the line and put it in tonight

  2. asherz Says:

    Yra- You are my FX and interest rate guru so I read your comments with great interest.
    In your February 3 2016 blog, you wrote:

    “The 2/10 U.S. yield curve has closed below the 115 positive sloped level for two straight session. This was the level of support that the curve had held for the past 40 months but with Japanese bonds trading at 0.08% (8 basis points) and the German bund trading at 0.30% (30 basis points), the world is in search of high-quality sovereign debt so demand increases for the U.S. 10-year note and all the other U.S. Treasury paper. ”

    I made a strong note of that, the breaking of a 40 month support, level of 115 basis spread to be significant.

    The Central Bankers are in a debt spiral and thrashing about, and now find themselves in a negative interest whirlpool, destroying the banking industry, pension fund industry and insurance industry.

    With equity markets near their historic highs, and the S&P p/e at a nosebleed 24x while GAAP earnings are declining, the bubble should be approaching its maximum inflated size.

    Why do you think a 2/10 US yield spread of 75 basis points is a big level for the Fed?

    • yra Says:

      Asherz–the 75 level was just a long term support level generated from the same work for the 115 on a shorter duration–the 75 level reflected back to 2007 and I believe if you search to later then feb 3 you will find a note to the 75 basis point level.But I certainly appreciate you noting that and holding my thinking to a standard I hold myself to

  3. Blacklisted Says:

    “Responsible Nationalism”. Are you kidding me? Oxymoronic statements like this coming from the father of neg rates is certainly not a surprise. Nationalism is rooted in emotion, which is rarely responsible.

    I would hope that Trump would not let the likes of Summers anywhere near the WH. Our job is to keep people like Summers out of policy and class rooms.

    Playing in “a global public investment era” in the middle of a popping govt bond bubble ought to prove interesting. Kinda like playing shuffleboard on the deck of the Titanic. Discerning the path and flow from public to private would seem to be a better use of ones time and money.

  4. El Contango Says:

    with a bit of embarrassment it is that yesterday I finally got and read the entire introduction to the 3rd edition of “The Rotten Heart of Europe”.

    Sounds like Summers and his fellow “Nomenklatura” might have read it too, and are going to save the EU through masking their real intentions and faking a concern for the little people of lesser intelligence and understanding than the anarcho-tyrants and their malignant lunacy.

    What a great piece of writing! I haven’t made notes from the introduction to a book in a long time, but did yesterday. Thank you Yra for saying it again the other day, so I’d take the action and immediately better understand what my gut has told me all along about the Euroland. The new barbaric state.

    You know that you are what keeps Santelli from having a coronary on set… thanks for that too.

    • yra Says:

      el contango–spread the word on the Rotten Heart to everyone and it is unbelievable about the depth of Bernard’s knowledge–and thanks for all your support

  5. Arthur Says:

    Yra, what do you think about Canada’s economic policy? http://www.economist.com/blogs/economist-explains/2016/07/economist-explains-8

    • yra Says:

      Arthur—as you know I believe that Canada is the laboratory for Larry Summers fiscal stimulus experiment in the time of large budget deficits,negative interest rate environment–remember it was Summers who advised Trudeau’s move to run on a program of massive fiscal stimulus

  6. GreenAB Says:

    the BLS report was so strong, that the stock marked is jumping bigtime. yet the 10year is still at record lows. nothing to see here…

    • yra Says:

      Green AB–perfect post and I think you need to get to Frankfurt and carry a protest sign —it is the ECB that is blowing the massive asset bubble and nothing says it more then the global sovereign bond markets.The large number provided a perfect test for the strength of the bubble blowing —Einstein’s theory of interest relativity

  7. Chicken Says:

    The entirety of the Swiss curve, all the way out to 50 years, is negative. Feels like a disconnected feedback loop.

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