Notes From Underground: In Preparation For Things To Come

On the Santelli Exchange, me and Rick discussed the very weak ISM non-manufacturing and its impact on the FOMC. The surprise weakness sent PRECIOUS METALS soaring, the DOLLAR lower, BONDS AND EUROPEAN SOVEREIGNS HIGHER and EQUITY MARKETS moderately higher. The FED is under the microscope from so many analysts but the surprise of the day was the OP-ED piece by Professor Larry Summers in the Washington Post. Summers put an academic gloss on the erudite review of Jackson Hole but this sentiment is key: “My second reason for disappointment in Jackson Hole was that Fed Chair Janet Yellen, while very thoughtful and analytic, was too complacent to conclude that even if average interest rates remain lower than in the past, I believe that monetary policy will, under most conditions, be able to respond effectively. THIS STATEMENT MAY RANK WITH FORMER FED CHAIRMAN BEN BERNANKE’S UNFORTUNATE OBSERVATION THAT SUBPRIME PROBLEMS WOULD BE EASILY CONTAINED,” [emphasis mine]. This is a harsh assessment from  a fellow academic, but more importantly it is a stinging criticism of the FED’s forecasting history.

Yra & Rick, Sept. 6, 2016(Click on the image to watch me and Rick discuss weak U.S. data, the Fed and G-20)

***Tomorrow the Bank of Canada releases its interest decision and consensus is for UNCHANGED at 0.5%. The BOC has never imbibed from the well of QE so nothing to change in that regard. The Canadian government has embarked on a fiscal stimulus program so the BOC will be reticent to change monetary policy.

***The European Central Bank meets on Thursday with a Draghi press conference to follow at 7:30 a.m. CST. The Financial Times’ front page headline, titled, Bond Scarcity Fears As ECB Passes One Trillion Euros of Purchases,” poses problems for Draghi. As I have documented during the last 12 months, the ECB would eventually find itself looking for assets in all the wrong places according to its regulations. Draghi needs to find assets to buy but is presently restricted by its legally imposed capital key, which keeps the ECB purchases to each countries’ contributions to ECB capital.

This is a problem that Draghi will try to evade by either extending the QE program or CHANGING THE MAKE-UP of the asset purchases. If the ECB embarks on a BOJ or SNB program look for Draghi to announce the ECB buying large-cap European stocks or sub-standard corporate bonds. The ECB has already been criticized for buying the private bond offerings of two large European energy concerns. The capital key will be tough to circumvent as the Bundesbank President Jens Weidmann will be vigilant in protecting against the ECB as a conduit of fiscal policy through circumventing the capital key regulations. I will discuss this further tomorrow night.


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4 Responses to “Notes From Underground: In Preparation For Things To Come”

  1. asherz Says:

    Yra- On your Santelli Exchange you allude to Trump’s mention of the “false economy”. We have also had “false markets”, markets that no longer have proper pricing mechanisms. When Central Banks can create trillions of currency and use those funds to influence markets, whether they be interest rates, commodities or equities, they are false. See the editorial from the New York Sun below.

    In Janet Yellin’s transcript of her speech at Jackson Hole, in Note 24:
    “24. In the simulations reported by Reifschneider, ‘Gauging the Ability of the FOMC to Respond to Future Recessions,’ in note 8, overcoming the effects of the zero lower bound during a severe recession would require about $4 trillion in asset purchases and pledging to stay low for even longer if the average future level of the federal funds rate is only 2 percent.”

    I’ve been saying for years that the Fed has a third mandate to support the stock market. Stanley Fischer actually admitted it last week.
    “Well, clearly there are different responses to negative rates. If you’re a saver, they’re very difficult to deal with and to accept, although typically they go along with quite decent equity prices. But we consider all that and we have to make trade-offs in economics all the time, and the idea is the lower the interest rate, the better it is for investors.”
    There you have it. The heck with savers, retirees, pension and insurance entities, you’ve got the stock market folks. The fact that stocks used to be valued at discounted future cash flows, and those flows are now declining while stocks make new highs doesn’t matter. When the music is playing, keep dancing.
    So the BOJ is now the largest shareholder in the Nikkei and the SNB has 20% of its assets in equities. Soon to be followed by the ECB (whatever it takes) and eventually the Fed. The alternative for them is an unprecedented crash and world wide depression.

    Atlas doesn’t realize that the world has become too heavy for him to hold. However only the Greeks considered him to be a god, Except for the Greenspans and his successors, the current Masters of the Universe.

  2. yra Says:

    Asherz–excellent post and much of the Fischer confession came from the morning with Father Tom Keene –also the Reifschneider footnote is covered well in Larry Summers oped piece—the FED is in everyone’s cross hairs and it is time for them to go hide in the bush of money trees and stay quiet until spoken to—Lael Brainard is speking in Chicago on the 12th but I will not be able to attend but her interview may have greater importance then anything emanating from the other Governors.And I wish someone would interview Carmen Reinhart about the Fischer admittance to financial repression,for the bottom line is “there is always a sucker in the game” and the Fed has played the saver as the patsy in three card monti-in the park.

  3. Arthur Says:

    Excellent, Yra.

    Higher inflation might be just around the corner, but we haven’t seen it yet.

  4. Chicken Says:

    Hey Mr. Fischer, I hope you’re reading this.

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