Notes From Underground: William Dudley Starts Goodbye With a “Dud” Speech

As reported over the weekend, New York Fed President William Dudley is turning in his keys to the printing press and leaving the Fed in mid-2018 to spend more time with his family (Goldman Sachs). In a speech delivered to the Economic Club of New York, the reigning king of the New York Fed praised the central bank for its effort to prevent a collapse of the global financial system. He laid blame for the crisis on all the familiar miscreants but mostly stressed that “the safeguards put in place in response to the crisis are fully appreciated and respected.” President Dudley maintains that the global financial crisis was a result of lacking the tools to regulate the entire financial system and sums up his analysis: “We had woefully inadequate regulatory regime in place,and while it is much better now, there is still work to do.”

This is PURE RUBBISH for the FED had plenty of tools to macroprudentially regulate the U.S. financial system but chose not to use them as they were always leery of POPPING A BUBBLE. Better to CLEAN UP THAN LEAN INTO a possibly misdiagnosed bubble. Chair Greenspan helped fuel the financial crisis by calling on homeowners to use their asset as a piggy bank and refinance their appreciating home values with ever larger loans in an effort to stimulate demand. Chairman Bernanke aided the financial crisis by continually referring to the housing downturn as contained. The FED could have raised reserve requirements, which would have slowed the expansion of leverage as mega-banks were leveraging their balance sheets via the shadow banking sector to use highly risky loan ratios of 20 times to one or higher (the use of prime brokerage accounts). As usual, Dudley shows his loyalty to his banking friends on Wall Street, the ultimate “sycophant of the ruling classes” (Karl Marx).

***On Sunday I wrote about the situation in Saudi Arabia raising the specter that the weekend events were not a one-off geopolitical event but rather the development of a growing problem with possible global systemic impact. The importance of Russian/Saudi cooperation should not be minimized. Following my line of thought, I purchased gold, which I was short, thinking that the metal would open substantially higher on the news. But the market reacted to the Saudi news as if just another geopolitical event. I have continuously advised that buying gold on the outbreak of global violence is a trade, not an investment, because heightened tensions like North Korea eventually subside and the GOLD RALLY WILL QUICKLY FAIL. However, Saudi Arabia is not a momentary crisis but rather a sustained process as we have watched the oil market rally since the Russian/Saudi meeting in Moscow. The media spent the day feeding the narrative of the Crown Prince’s actions as a mere effort to clean up corruption in the Kingdom.

But unlike most days the GOLD and SILVER sustained the rally as the talking heads kept the beat. Crude oil, which also failed to rally last night wound up almost 4% higher on the day. Take note of this one-day change in the market’s disposition. Check your technical levels to see if the rallies in GOLD, silver and oil can hold support levels. The OIL has already been a star upside performer and if its concerns are genuine the precious metals OUGHT to follow. Again, one day’s trading action does not a trend make but there appears to be a great deal of dry tinder with which to start a prairie fire.

The equity markets sloughed off the Saudi news as the bull continued powered by the announcement of Broadcom desirous of purchasing Qualcomm for $130 billion. On late-Monday, Disney and 21st Century Fox were in talks for Disney to purchase most the Murdochs’ Fox assets. The existence of ultra-cheap money is fueling merger mania as there is no problem issuing debt to provide the liquidity for corporate purchases. Yet again, this is a warning of the hazardous conditions ahead when European high-yield debt trades at a lower yield than U.S. 10-year notes. The European equity markets did not perform as well as the U.S.–no major mergers–so let’s see if the Saudi situation begins to bleed into the equity markets in the U.S. as the week proceeds.

BONDS were dragged higher as the ECB was purchasing debt instruments. Last week the ECB only purchased 7.5 billion EUROS so in a short November month there is still 52.5 billion euros of assets to be bought. The ECB has a great deal of firepower to keep bond prices bid. The U.S. 2/10 and 5/30 curves continued to flatten in the face of rising oil prices (must be the transitory effect). I would say it is more likely what Rick Santelli called a dragging effect, but I prefer to name it a DRAGHIng effect. Are corporate mergers signalling an end to present conditions as they rush to get the funding done? Elevated stock prices are a form of financial ease as corporate boards deem to spend an “overvalued currency.”  perfect example of Gresham’s law where bad money drives out the good as we saw with the Time Warner/AOL merger in 2000.

***Tonight at 9:30p.m. CST the Reserve Bank of Australia will announce its overnight cash rate. No change is expected as the rate to hold at 1.5%. Governor Lowe may be very dovish in his statement because the Aussie dollar has been strong against its main competitor, New Zealand. The AUD/NZD cross is trading at 1.11, 6 percent higher on the year. The Aussie has weakened against the U.S. dollar but held against most of its major trading partners. The RBA may be dovish as they are concerned about the recent rise in commodity prices being a source of future strength for the currency. Oil, iron, copper are all showing vigor.

***EUR/GBP is having a significant correction as the negative tone from the Brexit meetings with EU officials have toned down. This is a sizable correction but its ultimate test will come again from the 200-day moving average at 0.8764. The BOE wants a weaker currency but the ECB activity makes for a challenging environment. Peter Boockvar raised a good point Monday: With all the talk of increased economic activity in Europe and Japan, why are their financial institutions not participating in the equity rally? Japanese banks have been DOA and the large European banks, which are the center of the EU financial system are stagnant at best. The more equity values increase the divergence in asset classes raises questions about the underlying strength of the economic foundations.


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7 Responses to “Notes From Underground: William Dudley Starts Goodbye With a “Dud” Speech”

  1. Rob Syp Says:

    Important read…

  2. Lawrence Stern Says:

    Any further update?

    Lawrence M. Stern
    Stern Capital LLC
    420 Lexington Avenue
    Suite # 300
    New York NY 10170
    212 832 1200 Tel
    212 832 1240 Fax
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  3. Rohr (Alan Rohrbach) (@MacroMeister) Says:

    WOW… thanks for the heads up on that. Can’t even begin to believe that Dudley resurrected that lame “woefully inadequate regulatory regime” BS. Your PURE RUBBISH assessment is spot on.

    Maybe this guy was in a coma, or never read or saw “The Big Short” on the across the board failures of the PEOPLE at the agencies and debt raters? But the regime was just fine if anyone up to and including Alan Greenspan had bothered to enforce the regs that were already in place.

    Dodd-Frank was a huge ass covering exercise so that Congress and the agencies could PRETEND they didn’t have the tools, and the then ascendant Dems could ‘punish’ the banks for Congress’ own failures (re: FANNIE, FREDDIE, sub-prime, etc.) Good call.

    Best –

  4. Chicken Says:

    Wonder what the FED thinks of the flattening curve, and how do they propose rendering that transitory?.

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

    Hi again-
    I also see where the 2-10 US yield curve is slipping below the levels I think you had noted previous were critical. Very interested in your further thoughts on that as well.

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