Notes From Underground: FOMC Decision Day Is Upon Us

Janet Yellen and the FED take center stage tomorrow and the consensus is for NO CHANGE. The market believes the FED will be on hold until March. BUT I OFFER THIS: If I was the FED chair I WOULD RAISE RATES 50 BASIS POINTS to take some of the risk out of the U.S. equity markets. The S&Ps are virtually unchanged since the December FOMC meeting but the market’s enthusiasm for anticipated tax cuts, regulatory relief, and possible currency intervention means the FED cannot wait to let the economy run “hotter for longer,” especially because of the 4.7% U3 unemployment level. If Chair Yellen wishes to burst the TRUMP exuberance it is time to move aggressively to stem the rise of a potential inflationary threat.

DO I THINK JANET YELLEN WILL PURSUE THIS PATH? It’s highly doubtful for she does not like confrontation, especially with the markets. Remember the Fed’s retrenchment from its move to taper QE? The famous taper tantrum? I offer up this scenario: If the Fed did shock the market with a SURPRISE rate increase, or maybe more IMPORTANTLY, an announcement to shrink its balance sheet, let the DOLLAR RALLY (CURRENCY FUTURES DECLINE), let GOLD AND SILVER DECLINE, then buy the BREAK on any unanticipated FED action. Of course, this is all just a dream. We’ll have to wait for the minutes on February 22 to see what the Fed is thinking.

Why do I want to sell the DOLLAR AND BUY HARD ASSETS? As I warned last week after Trump met with auto executives. I cited Mark Fields’ comments about currency manipulation being the “mother of all trade barriers.” Today, Peter Navarro, Trump’s trade CZAR pointed his finger at the Germans for manipulating the EURO lower. In a Financial Times article Navarro said, “A big obstacle to viewing TTIP as a bilateral deal is Germany, which continues to exploit other countries in the EU as well as the U.S. with an ‘implicit Deutsche Mark’ that is grossly undervalued.” This has been a discussion in NOTES FROM UNDERGROUND for the last seven years. And LET ME BE CLEAR: PROFESSOR NAVARRO is trying to create a narrative of currency manipulation and HAS IT WRONG. In fact it is not an implicit DEUTSCHE MARK but an ¬†implicit French franc.

The Germans have been opposed to President Draghi’s QE program for it is resulting in higher inflation in Berlin’s economy. If it was a DEUTSCHE MARK the currency would be MUCH STRONGER. Based on economic fundamentals the D-MARK would be at 1.30 per dollar rather than the current synthetic level of 1.81 based on its weight within the EURO. What Navarro did today was to declare WAR ON MARIO DRAGHI, for if Draghi were “forced” to end QE to placate the Trump administration and its nationalistic economic agenda, ITALY, SPAIN, PORTUGAL, GREECE and others would find themselves collapsing under its massive load of debt. Without Draghi’s QE and promise to do “whatever it takes,” the global financial system would implode. The only way to save Europe if QE ended would be for Germany to acquiesce and agree to embark upon a program of continued TRANSFER PAYMENTS to the debt-crippled economies of Southern Europe. With elections in the fall, Merkel may not be able to do much.

After the initial statement by Navarro, President Trump held a meeting with the CEOs of large PHARMA CORPORATIONS. The president went out of his way accused “… China and Japan of using monetary policy to pursue ‘devaluation’ in the past to gain a trading advantage over the U.S.” This is a great deal of rhetoric directed toward unilateral intervention by the Trump Administration and Treasury Secretary nominee Steve Mnuchin hasn’t even been confirmed yet. As I warned last week, the currency market is overweight LONG DOLLAR positions so a short covering rally could be explosive.

Tonight, the Japanese YEN trade will be interesting as the currency has rallied 3% during the last two trading sessions, even as the BOJ had no change to its policy. If the YEN sells off tonight check your support levels because anytime the Japanese are challenged on its currency policy there is an effort to placate the markets and allow the currency to rally. The ALGO drivers have been reticent to measure fundamentals into their trading mechanisms but with a new sheriff at the BORDER things can change quickly. Ok, Yellen you’re up to bat.

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18 Responses to “Notes From Underground: FOMC Decision Day Is Upon Us”

  1. asherz Says:

    President Trump was elected primarily because he promised to bring good, high paying jobs back to America from Mexico, China and elsewhere. He is pressuring the Carriers and the Fords to keep and open plants here.
    Part of this strategy is to focus on currency manipulation by the competition. That means the dollar has to get weaker, especially against the Yuan, the Euro and the Yen.
    Gold and silver in dollar terms are beginning to anticipate this. Higher interest rates would pose head winds if a weaker dollar is desired. Look for minimum changes in our rates unless and until inflation begins to appear. Global debt will do its part to prevent that.

    • Joe Says:

      Asherz: agree. But whenever someone points to Chinese manipulation of the Yuan, I can’t help recall that the Yuan is tied to the dollar, albeit in a band that has changed thru the years. Might that band be meaningless today? I guess my reaction has always been to say it’s the Fed’s management of the reserve currency that smacks of manipulation. (I know it can’t be that simple.)

  2. kevinwaspi Says:

    With all due respect, if you were the Chair of the Fed, it would never be in the box it is in!

  3. David Richards (@djwrichards) Says:

    Politicians invariably fail, beyond some temporary initial success, when it comes to jawboning currency. Trump admin will be no different than every prior incident in history.

    The looming debt crises and existential threats to governments around the world will trump Trump’s effort to jawbone USD lower. Just look to history, as we’ve seen this movie before over three millennia. It shows that the core economy (this time it’s US) has always been the last shoe to fall, first shooting higher beforehand in reaction to capital flows. It’s different this time?

    As for gold, think… Living in Asia I can buy physical bullion for much less than the comex price. So why don’t I arbitrage it and become instantly rich? Because gold here is an asset of marginal value insofar as it is unlawful, under penalty of death, to sell or send it abroad. Thus, BTC took the place of gold, until that remarkable day when BTC fell 30% in reaction to the clampdown on it too. Back to gold, in sharp contrast to five years ago, the sale of gold coins & bullion is becoming increasingly restricted. China, India and parts of western Europe already. Governments are now declaring gold a “currency of criminals” so we can see that the future legal status of gold is likely the same as the 1000-rupee and 500-Euro banknotes.

    • yra Says:

      David—–yes politicians have failed to jawbone currencies but that is to jawbone them higher for if a central bank wants to push a currency lower,Switzerland being the exception,it can run the presses and create enough currency to send prices lower.You seem to want to make a bearish case for Gold which is certainly logical but my view has been and it has been correct since 2008 is that in a realm of negative real yields and nominal zero or negative yields Gold retains a place.Gold will continue to have value as long as central banks are deemed to be on the edge of panic mode to fight the fear of deflation.That was my point about Navarro declaring war on Draghi for any discussion of an undervalued EURO puts the joker in a box he cannot escape from.His rush to expand the ECB balance sheet was done to trap the Germans by trying to create the structure of a EURO bond through the backdoor.It is what I refer to as the Bronx tale syndrome–NOW YOU CAN’T LEAVE.The questions to ponder as we move forward continue to be—Who guarantees the ECB and whose currency is the Euro?Also,the fear of bailins as the template for european bank solvency in keeps an interest in gold .When governments get nervous gold is outlawed–see Roosevelt and the suits over gold backed bonds—-but it is the idea of governments debasing their currencies to resolve debt crisis that keeps gold in play—when I asked FOMC Governor Jerome Powell a question about who guarantees the ECB he quickly answered ,”They have a printing press”–unfortunately for Draghi it is not a Heidelberger Druckmaschinen—that is where Navarro has it wrong.

      • David Richards (@djwrichards) Says:

        If this decade is a guide, gold is not an effective hedge against the quantity of money. The gold price actually collapsed during QE2 and the so-called “QE to infinity” of QE3. Go figure. I won’t even try. As a technician, all I know is that the gold chart remains in a bearish primary downtrend. And almost everyone has already called a gold bottom but Mr Market has a habit of fooling the majority.

        So I don’t understand what place gold has outside of tinfoil hat wearers – but more experienced and greater minds than mine have postulated that gold is really a hedge against government. So gold will rise on a sustained and convincing basis only as government loses its authority and control.

      • yra Says:

        David—in 2013 when Gold began its major correction I posited din this blog in February that it was time to sell gold in the 1600 area and move into equities as the market was gaining comfort that the FED and other central banks seemed to have weathered the storm and in a zero interest rate world equities would offer the best value and at least dividends higher then bond yields were attractive—-the gold bugs blasted me as i appeared on watchdog USA and they went crazy but i wish I still had the trade but I am not a gold bug and trade the market as I fundamentally see and use the technicals to find levels of low risk as possible.I respect your technical views but as I say –when short term yields go positive real yields I will be an aggressive Gold bear.Also,for me Gold is not solely a dollar trade but i use it in line with many fiat currencies the GOLD/YEN chart may be different then the Gold/Swiss chart or outright gold/dollar —I am not a one-dimensional analyst in a hat tip to Marcuse

    • Joe Says:

      Yra, I remember the gold call well. It could not have been timed any better.

  4. Richard H Papp Says:

    This past Friday the 15 week Advance/Decline line of all issues traded on the NYSE turn positive after several months of being negative. Will the generals follow the troops higher??????????

  5. Pedro Garcia JR Says:

    Question about the trumps dollar issue I feel no one is talking about is the dollar and dept issue. What’s going to happen if we push our dollar down and other currencies go up, wont our dept as a country start be inversely affected? Our strong dollar helps pay the dept interest, If we lower the dollar, wont it effect all the other relationships around the world as the US Government will have a hard time paying the bills to the rest of the world? I feel like no one is talking about this aspect also. Ira could you weigh in on this or am I just not informed enough. I’m still a beginner learning this stuff.

  6. asherz Says:

    David Richards- Gold topped out in 2011 after moving from 250 to 1900 in the previous decade.
    You correctly point out the conundrum of QEs being accompanied by weak precious metals. Not easily explained in normal free markets. There are some, including me, who are convinced that a few bullion banks have been suppressing the price, especially since 2013.Analyzing the weekly Commitment of Traders released every Friday shows who the players are. I believe that the motive is obvious. The central banks that have had the printing presses working overtime require the touchstone of currency for millennia, gold and silver, to be weak in order to maintain the credibility of fiat currency. You are also correct that this will end in failure.

    • yra Says:

      Aherz–wisdom from the halls of Columbia in the 1950s

    • Joe Says:

      Asherz– Could not agree more. Some of us have tired of pointing out the manipulation by bullion banks (& central banks?) via futures markets as it always seems we’re told to take off out tin foil hats.

  7. kevinwaspi Says:

    Fed leaves rates unchanged….. “I’m SO SHOCKED!”

  8. GreenAB Says:

    Thanks for taking on Mr. Navarro, Yra! I agree 100%.

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