Notes From Underground: Some Areas Of Concern and Importance

As the tinder of prairie fires builds, these areas of concern are important because of the potential impact they can have on the market:

1. Sunday’s election results in Austria give rise to concerns about the rise of euroskeptic groups in several European nations. Yes, the anti-immigration sentiment appears to be the dominant variable in bringing a right-wing government to Vienna, but the sparks from xenophobia can manifest into an anti-ECB issue as domestic citizens are asked to foot the bill for bail-outs of Italian banks. Many citizens of various European states have borne the costs of bailing out Italy, Spain, Ireland, Greece and Cyprus through negative interest rates, the ultimate tool of financial repression. German two-year notes are currently -73 basis points, even though German inflation is approaching 1.7%, resulting in a real yield of NEGATIVE 2.5% for the savers in German-based banks. Regardless of what the ECB does in terms of quantitative tightening President Draghi has maintained that negative rates will remain lower for longer. Financial repression will be the next theme for the European right.

2. The issue of the next Fed Chair continues to provide uncertainty for all asset classes. This afternoon Bloomberg News published a story titled, “Taylor Impresses Trump For Fed Chairman, Warsh Slips, Sources Say.” This story pushed the precious metals lower, short-term interest rates and the DOLLAR higher. Of course equity markets initially dropped but recovered as earnings seasons is the dominant equity variable this week. I know that journalists need to protect their sources but when markets are subjected to profit and loss, the issue of unnamed sources should be an issue for the SEC/CFTC regulators, especially in an electronic world dominated by algorithmic-programmed HEADLINE READERS.

This continued predatory practice is why I advise using caution in chasing any market movement. Enter at your risk levels and don’t be financial prey for the algos. One issue I wish to raise in regards to the next FED chair is that Janet Yellen MAY BE REAPPOINTED AS THE PRESIDENT USES THE FED APPOINTEE AS A BARGAINING CHIP TO ACQUIRE DEMOCRATIC VOTES FOR TAX LEGISLATION. ONE THING THIS PRESIDENT KNOWS IS NEGOTIATION AND EVERYTHING HAS A PRICE. I don’t believe Cohn has that strength but the known entity of Yellen may be what Trump is willing to negotiate to get tax cuts/reform going around the fiscal hawks in Congress.

3. Janet Yellen gave a speech at the G-30 meeting over the weekend. There was nothing particularly new in the speech as it echoed a BIG READ from the October 12 FINANCIAL TIMES. A hat tip to John Brady for pointing out several key paragraphs but one of critical importance: “To be sure, our understanding of the forces that drive inflation is imperfect, and we recognize that this year’s low inflation could reflect something more persistent than is reflected in our baseline projections. The fact that a number of other advanced economies are also experiencing persistently low inflation understandably adds to the sense among many analysts that something more structural may be going on.Let me mention a few possibilities of more fundamental influences.” Chair Yellen goes on to mention the areas of concern voiced by several FOMC members in recent speeches.

But in the FT article titled, “Setting Policy In The Dark,” BIS Chief Economist Claudio Borio called out all the central banks. He said, “If one is completely honest, it is hard to avoid the question: how much do we really know about the inflation process.” Many other prominent economists across the spectrum cite the need for the FED to be open-minded to what they don’t know. The article also cited Professor Christina Romer, former Chair of the Council of Economic Advisors under President Obama, who said: “If such research suggests our ideas explaining how the economy works are wrong or need to change, then central bankers need to embrace those ideas.” Returning to Borio the article noted that arguments about global forces having a significant impact on domestic inflation seem to be more convincing than pundits allow. Borio asked: “Is it reasonable to believe that the inflation process should have remained immune to the entry into the global economy of the former Soviet bloc and China and to the opening up of other emerging markets?”

Borio also noted that the actions of central banks have succeeded in increasing global debt levels as he said, “The result is that it will be harder ‘to raise interest rates without causing economic damage, owing to the large debts and distortions in the real economy that the financial cycle creates.'” If real estate is location, location, location then financial dislocations are debt, debt, debt. Areas of concern, indeed. Market impacts and profit potential will be our concerns.

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11 Responses to “Notes From Underground: Some Areas Of Concern and Importance”

  1. Asherz Says:

    My own theory on the lack of price inflation goes as follows. ZIRP and QE have produced asset inflation. Stock and bond markets and real estate prices keep rising because money ex nihilo has to go somewhere and these assets are where they find a ready home.

    However consumer prices remain low. This may be explained by the huge amount of debt that has been created over the last 9 years. The possibility or probability that much of this debt will never be repaid is restraining the consumer’s spending as fears of an economic tsunami are ever-present, especially after the 2008 episode.. When the consumer anticipates inflation, he buys in the present as he anticipates higher prices later. The opposite is the case now. In addition, the lack of real wage increases has the consumer buying only what he needs. The disappearing middle class and the widening of the gap between rich and poor are outgrowths of what we are witnessing.

    The central banks overstayed their bailouts begun in 2009 and their continued interventions in the markets will not end well.

    • Yra Says:

      Asherz–much too poner here but ponder I will

    • Chicken Says:

      “Stock and bond markets and real estate prices keep rising because money ex nihilo has to go somewhere and these assets are where they find a ready home.”

      Seems to me this is what the FED wanted, for their employer. As for bailing out gamblers, well they are the employer.

      It’s the same pump and dump strategy of wealth transfer (rinse and repeat) for those with short memories. Load them up with unsustainable debt then force default, bankruptcy and foreclosure, sweep up the assets at pennies on the dollar.

      It’s not different this time.

  2. Blacklisted Says:

    http://www.zerohedge.com/news/2017-10-17/fbi-uncovered-russian-nuclear-bribery-plot-obama-approved-uranium-one-deal-netting-c

    As was confirmed today, the Obuma-Clinton Cash machine, along with other career politicians, have sold us down the river … and if it was up to Democratic voters they would not only take away our paddles, but chop off our hands.

    Corruption spreads like a cancer and the global economy implodes from the periphery to the core. As confidence decreases, capital seeks safety and people leave as taxes and fees are raised to cover govt incompetence and their desire for perks and power. This is deflationary, not the hyperinflation the gold bugs have been selling with QE that parks and speculates.

    As pathetically corrupt and weak the US economy is, unemployment, GDP, and poverty are still better than the periphery. It may take the rest of the year to get through DOW 23,000, but when it does look out above. Remember, it’s a rising dollar and rates that creates a crisis big enough to reshuffle the economic deck.

  3. Joe Stoutenburgh Says:

    A slightly different take on the consumer. In my experience the “typical” consumer is not very knowledgeable about ZIRP, QE, or the machinations of central bankers. But they have a well-founded dread that all these incomprehensible activities are likely to benefit the big banks at their expense.

    Conversations in my local coffee shop reveal many college grads have difficulty grasping very large numbers (interchangeable use of billion and trillion). As such they don’t comprehend the size of government and corporate debt or the potential impact on inflation.

    At the low income end, one need only listen to the baristas talk. They can barely afford a cup of latte they serve, but they rack up credit card debt on new smart phones, tattoos and gambling trips to Las Vegas.

    The point has frequently been made in this blog that ZIRP and QE have effectively broken the pricing mechanism for credit and caused poor capital allocation. My theory is that’s not all that has been broken by this folly. Consumers have changed the way they earn and spend, and what they spend it on. I strongly suspect that measurement mechanisms have not tracked these developments, enslaved as they are to historical consistency.

  4. Dustin Says:

    It seems like you are aggregating theories on the result of debt expansion during low/negative rate and inflation environments without providing your own, which is specifically what i was hoping to hear. Please say what you think the result of this will be.

    • yra harris Says:

      Dustin–what particularly are you thinking about.As you know many of these issues have been discussed in this blog over the years —get specific and I will be happy to provide my thoughts.The over all view is that as debt piles up in low interest rate environment when rates go up many of the floating loans will see higher rates–if rates go up because wages are rising as the Fed is trying to accomplish–tell me where you think corporate profits go?

      • Chicken Says:

        Would it be incorrect to assume corporate hiring and worker wage increases occur when corporate profits exist?

        If yes, and floating rates increase (for whatever reason), this detracts from the motivation for wage increases?

        Unemployment claims report is at 44 year lows.

  5. The Bigman Says:

    I’m turning Japanese
    I think I’m turning Japanese
    I really think so
    Turning Japanese
    I think I’m turning Japanese
    I really think so
    -The Vapors

    Now I am not a PhD economist just a retired doc nursing his modest nest egg but when I look at Japan, the inventor of ZIRP and QE what do I see:

    1. No inflation
    2. Low productivity
    3. Increasing income inequality (moderated by income redistribution in Japan-soon coming to a neighborhood near you)
    4. Stagnant wages due in part to part-time workers

    Now Janet do these sound familiar? maybe just maybe these are a result of financial repression and CB manipulations and not such big mysteries. Just saying…..

  6. kevinwaspi Says:

    All excellent points. Some readers may be interested in a recent BIS working paper, focusing on demographics relative to interest rates, economic growth, and the ‘corrective actions’ of our esteemed central banks. Available at: http://www.bis.org/publ/work656.htm

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