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.