Notes From Underground: Looking for Headwinds In All the Wrong Places

It’s tough to enjoy the final days of summer when the FED can’t just relax their wind pipes. The continued contradictions emanating from those who sit in the same meetings is jeopardizing the Fed’s credibility … AGAIN. Last Monday, San Francisco Fed President John Williams published an economic letter in which he posed the concept of either raising the inflation targets, or the Fed ought to target a NOMINAL GDP level. This was perceived to be an extremely DOVISH view as it would keep the FED on HOLD far longer than the market currently predicts. The problem was that Williams had voiced a HAWKISH view just two weeks earlier. The quick about-face makes me wonder if the Fed’s logo should be the Roman god Janus.

Following on the release of the Williams letter was a speech from New York Fed President Bill Dudley, who intimated a high probability of a rate increase at the FOMC meeting in September. The back and forth isn’t keeping the markets off-balance because the SPOOS continue to make new highs  regardless of the jib-jab from FOMC members. The release of the July 26-27 FOMC minutes added to the confusion. The media headlines said the minutes reflected a SPLIT at the Fed. That’s NONSENSE. The vote was 9-1, which has been the status quo, except for the June meeting because of Brexit, Esther George returned to voting in favor of a rate hike.

If the Fed was SPLIT the vote would have been at least 7-3 so it is obvious that Chair Yellen is the most significant voice and the board will not break her desire for consensus. The FOMC minutes are filled with vacuous terms about members voicing concern — SOME PARTICIPANTS, SEVERAL, MANY, A COUPLE. With no names attached to any dissenters these terms do not connote a SPLIT AT THE BOARD. All dissension is nebulous until the vote is actually SPLIT.

Toward the end of the minutes it is clear that Yellen is in control, as it said: “Members again agreed that, in determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee would assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. They noted that this assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”

This is a comprehensive list of the HEADWINDS that the Yellen Fed have invoked in abstaining from raising interest rates. Next week, Yellen will speak at the Jackson Hole conference, which her predecessor Ben Bernanke used as a platform for presenting dramatic views on central bank policy. If my views about Yellen’s dovishness are correct then look for her to be more forceful about raising the issue of global headwinds and continued slack in the U.S. labor market.

***In the Financial Times yesterday, noted economist Joseph Stiglitz presented the idea of a bifurcated EURO, “A Split Euro Is The Solution For The Single Currency.” Readers of NOTES FROM UNDERGROUND know that the issue of the euro is an easy target for criticism and now that Stiglitz has written a book about the severe distortions caused by a flawed economic and political union. He said: “It is important that there can be a smooth transition out of the euro, with an amicable divorce, possibly moving to a ‘flexible-euro’ system,with say a strong Northern Euro and softer Southern Euro. Of course none of this will be easy. The hardest problem will be dealing with the legacy of debt. The easiest way of doing that is to redenominate all euro debts as ‘Southern Euro’ debts.”

Professor Stiglitz is correct in theory but the politic of the present configuration of the EU makes this an Alice in Wonderland proposal. Even if Stiglitz can wave his magic wand, the ECB’s current QE program is making this outcome more difficult every day. The massive balance sheet Mario Draghi is building will mean that any redenomination of EU debt will need the guarantee of the Germans or the end result will be a massive capital hit to the banks holding Southern sovereign debt. The question  still remains: WHO GUARANTEES THE ECB? As Draghi continues to build up the ECB‘s balance sheet the more systemic the problem becomes. Mario Draghi is the most dangerous man in the global financial system.

***In the July 29 FT there was an article titled, “The IMF Report Questions Its Role In Greece.” Over the last five years I have heavily criticized the IMF for its role in the TROIKA to bail out Greece’s creditors. An internal staff investigation coordinated by the Independent  Evaluation Office (IEO) revealed that under Director Lagarde’s leadership the IMF violated many of its long-established guidelines. “It highlights the concerns of many both inside and outside the fund, that the fund’s treatment of developing and emerging market economies quite different from its treatment of advance economies.”

Bottom line, the IMF bailed out German and French banks and forced Greece into a depression policy of forced internal devaluation of its economy. I SAID IT THEN AND WILL SAY IT AGAIN: THE U.S. CONGRESS WAS CORRECT IN NOT VOTING THE IMF INCREASED FUNDS. It’s amazing that the media has not made more of this. Sometimes the dysfunctional Congress does get it right. Lagarde should immediately be removed from her post. The IMF remains an atavistic colonial remnant from a Bretton Woods world.

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18 Responses to “Notes From Underground: Looking for Headwinds In All the Wrong Places”

  1. asherz Says:

    Yra you got it right on all counts in today’s post. Anyone paying attention to the multi-varied Fed representatives statements should look at them for the motive of the day and not for real substance. For example, Dudley’s remarks on a possible rate rise in September follows by two business days of the media blaring that the three equity market indices hitting new highs for the first time since 1999. With a weak GDP, lower Q2 profits, productivity down, leveraged balance sheets, and $13 trillion in global negative interest rates, Dudley sees an ever expanding over heated bubble that needed a word of cooling. No one pays attention as an almost $200 billion/monthly money creation has to go somewhere. So you have $100 million apartments, 9 figure prices on a painting and securities making new highs.

    But rest assured, if the Central Bankers want inflation, they will ultimately get it, but in spades. If you want to depreciate your fiat currency, you will achieve your goal. The house wins that game all the time. But at the expense not of what we have previously called STAGFLATION. That term implies a stagnant economy. We will need a new term. With global Debt/GDP at over 300% what will be the result? The dreaded “d” word, DEPRFLATION.

    Sorry for the doom and gloom, but the stupidity of the Fed policies over the last almost thirty years has one observer angry. And if the analysis above is incorrect, I’d love to hear a counter-argument.

    • yra Says:

      Asherz–hopw we get the conversation rolling

    • Chicken Says:

      “China and Russia buying all the gold they can find”

      Wonder if this is a hedge, they’re anticipating a major currency/debt devaluation? This would make others (ie:the $US, etc.) shoot higher, no?

    • Chicken Says:

      Thirty years of FED history is more than enough to overload my sprunjer.

  2. Chicken Says:

    I’m wondering what raising rates at this point accomplish?

  3. asherz Says:

    Chicken- Rates are not the primary issue although a .25 raise in December gives the by now a confused and discombobulated Fed some credibility. I’ve maintained all along that they won’t go much above that unless the vigilantes force them to. The real problem is the money creation that keeps feeding the gaping maw that are our markets, that require regular feedings in order to survive.

    Yra- As far as a conversation getting going on an August Friday when the siren songs of the Hamptons and the Riviera beckons, fugetaboutit.

  4. Rohr (Alan Rohrbach) (@MacroMeister) Says:

    Right again Yra on all of these issues, especially the IMF violating all of its canons in the bogus support for the Greek bailout of French and German banks. It would normally not participate in any rescue effort that could not project a country’s return to economic health… most definitely NOT the case with the Greek bailouts.

    And I have noted since early 2015 that the lack of structural reforms (i.e. failure of the political class) means all of the Brobdingnagian central bank efforts would not succeed. And they are at the end of the (very distended) line and on the verge of failure.

    Maybe that explains these rapidly shifting contrary statements from the Fed’s conflicted hawkish minions. In addition to Williams, I think Dudley has been on so many sides of the fence he doesn’t even know where the fence is anymore!

  5. Rob Syp Says:

    How does one explain the current correlations which seem as whacked as they’ve ever been. Is it safe to say when the below spreads return to some kind of normalcy is that when we will know the central bank policies have been stunted or imploded?
    30 year US Treasury vs. Stocks
    10 year US Treasury vs. German Bunds
    US Stocks vs. Metals
    US$ vs. Yen

    Have to finally say picking up and begin reading the Rotten Heart of Europe this summer is one of the best things I’ve done with my time. I purchased my copy when you 1st start peddling them and the thickness of the book seemed a bit overwhelming which delayed my jumping in. But I applied a line that I learned a long time ago from Joe Levy – a Chicago based entrepreneur
    “Begin and the Rest is Easy”

    • Rohr (Alan Rohrbach) (@MacroMeister) Says:

      Rob- With all due respect, the explanation is fairly clear: As noted above, it’s the lack of structural reform. The occasional (or in Japan’s case major) fiscal stimulus is meaningless when the bulk of businesses have lost the desire to invest and hire.

      That goes hand in glove with central banks’ multiple forms of massive accommodation supporting inefficient companies that would have folded in a normal recession. There is no incentive for the more efficient companies to invest in productivity gains that would have come from labor, tax, environmental, etc. reforms.

      Senator Corker admitted as much during Yellen’s spring testimony when he explained that higher productivity and wages are NOT in the Fed’s mandate, and the current low growth suppressing them is a clear failure of Congress.

      While not a big fan of the Trumpster, HRC’s prescription of higher taxes (which they never admit hit small business) and more regulation that will somehow help her create more jobs is not just a non sequitur… it’s total madness.

      I’ll readily bet on one thing: If the US gets four more years of what we’ve got now and even more, the Fed will be cutting rates again before they ever go up on any justifiable economic grounds (as opposed to Fed ‘normalcy bias’ psychology like December.)

  6. Rob Syp Says:

    And the catalyst for starting to read the book was the Brexit vote

  7. Rob Syp Says:

    Mr. Rohrbach thank you for the input. Taking it to the last 2 minutes of the game what you are saying is there’s really no way out of this Venus Fly Trap of slower growth and lower GDP for all economies which ultimately leads to “In the long run we are all dead”

  8. Frank C. Says:

    This is dedicated to the Central Bankers

  9. Rick Says:

    Why is no one even addressing the notional value derivatives that are piled high on the books of the major US Banks. If I recall the FASB (Financial Accounting Standards Board) approved an exemption to the banks so that they didn’t have to mark these worthless investments to the market. They now are in the “hold to maturity” category instead of “available for sale”. This way the worthless notional value securities can show on the balance sheet as full value. Give me a break.

    I can still remember when BofA transferred $17 trillion with a t of notional value derivatives from Merrill Lynch’s balance sheet to BofA balance sheet, so they could hide the value under the FASB exemption.

  10. Rob Syp Says:

    Jim Grant interview at

    When reading an article like this it’s “been there done that already” being a Notes subscriber….

    The top article at zero hedge this morning is the Fed’s plan of firing the howitzer’s with QE bombs.

  11. Rob Syp Says:

    at the next economic downturn or crises.

  12. Chicken Says:

    Alright folks, can’t we simply acknowledge that free market capitalism has failed to deliver and placed us all at grave risk of collapse thus it’s time for the bureaucratic system to assume control of all key components so they may be corrected before they bring civilization to it’s knees?

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