Notes From Underground

The noise just keep on coming and each are disrupting the markets in its own way and the president. Monday’s headlines from the financial press had large impacts on GOLD, COPPER, EQUITIES, and, of course, CURRENCY markets. Let’s look at the substance of the comments.

The first piece of news were reports emanating from a private Republican fundraiser, where Trump criticized the FED and his appointed Fed Chairman Jerome Powell. Readers of this blog are well aware that two months ago I wrote about the risk of President Trump attacking the FED for its policy of tightening liquidity and raising interest rates. The president has not disappointed as he continually directs venom at the FED as it continues to raise borrowing costs in an effort to offset the impact of the Trump tax cuts and fiscal profligacy.

Many quality, apolitical economists warned against the White House actions to stimulate an economy already at very strong employment. It backed Powell into a no-win situation in which the FOMC would have to raise rates in an attempt to meet its DUAL MANDATE. Now I believe that the FED OUGHT to have raised rates August 1 in an effort to push away from the politics of raising rates September 26, six weeks before the mid-term elections.

But Powell chose the safe path and followed the FED‘s design of raising based on its self-defined forward guidance. Powell didn’t wish to surprise the markets by veering off its guidance even though the strong data certainly provided cover for the FED to exert its independence over the market. But Powell stuck to the script and now has helped to politicize the FED as voters head to the polls in November.

On Wednesday, we get a look at the FOMC MINUTES so hopefully we’ll get a sense about how much concern was raised about the Trump tariffs, the strong DOLLAR and rising stress in the emerging markets. (This was all before the collapse in the Turkish lira and weakening in the Chinese yuan.) I have argued that the FED has a triple mandate as it is the central banker for the world’s reserve currency.

Peter Boockvar, Jim Bianco and the former Bank of India Governor Raghuram Rajan have all raised concerns about the FED raising rates while shrinking its balance sheet. This is leading to a rapid rise in borrowing costs for emerging market economies that have high levels of DOLLAR-denominated debt. The FOMC minutes will reveal if any of the FED members raised this issue of global dollar funding as a caution flag. If so, markets will put a dovish spin on the August meeting even though U.S. data remains strong.

Once the MINUTES are released attention will turn to the Jackson Hole Kansas City Fed Conference that begins Thursday evening and Powell speaking on Friday. Jackson Hole has risen in status as the world’s top central bankers, finance ministers and academics gather to discuss current issues in monetary policy. Sometimes, the markets are given a window into the thinking of the FED Chair. The most significant was Alan Greenspan, followed by Ben Bernanke, who, in 2010 laid out his plan for QE,which was cloaked in THE PORTFOLIO BALANCE CHANNEL.

The theory was that the PORTFOLIO BALANCE CHANNEL would lower interest rates to a low enough level that would force money out of passive investments and into seeking riskier assets in an effort to arouse Keynesian animal spirits. Unfortunately, for the emerging market economies the Bernanke plan resulted in a massive build-up of debt financed by ZERO /or NEGATIVE interest rates forcing developed market investors seeking a higher return on capital. Now that the FOMC is raising rates the servicing costs for the low-priced debt are on the rise. As Milton Friedman would suggest: There is no free lunch. Will Chairman Powell raise any concerns about the increased financial burdens for the global financial system? It’s doubtful, but the markets await any hint.

The second piece of information concerned Russia and raised the point that NOTES FROM UNDER GROUND suggested in previous blog posts. Trump hinted that the Russians could get sanction relief if, “Russia were to take steps to work with the U.S. on issues like Syria and Ukraine.” Now we have a sense of what Vladimir and the Donald discussed in Helsinki. The Russians want relief from the U.S. sanctions that prevent use of the SWIFT codes for international wire transfers. If Trump wants to be instrumental in curbing the violence and chaos in the Mideast (and curtail the influences of Iran and Turkey), he has to use the “good offices” of President Putin.

Putin is a wily international actor and knows he has a strong bargaining hand. Trump wants to succeed in bringing an end to the perpetual violence in Syria and other states. Nothing will happen without the Russians. The flawed policies of the Obama administration elevated the status of Russia in Syria and made them a key player in dealing with Iran.

Putin now has genuine leverage in aiding Trump in his desire to achieve some type of peace in the Middle East, a fragile arena where NARCISSISTS dare to tread. Such is the world we live in but from a financial standpoint it will make me add to my previous plan to be bullish on Russia investments. Watch RSX and the ROUBLE for confirmation, and, as I always advise do your work and find your loss points before embarking on any trade. Know where you are wrong before being correct. Sanction relief for Russia would bring in very needed investment. Are Trump and Putin trying to affect the U.S. elections in a more acceptable manner?

Tags: dual mandate, emerging markets, Fed, FOMC minutes, Jackson Hole Symposium, Jerome Powell, President Putin, President Trump, Russia, U.S. Dollar

This entry was posted on August 21, 2018 at 7:24 pm and is filed under Currency, Fed, United States. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.