Friday’s Wall Street rally into the close of month end was the ultimate statement of the FED listens. Yes, only to the needs of the financial world as ULTRA CHEAP MONEY pushes equity prices ever higher in the search for yield beyond 50 basis points. The BONDS remain bid as short sellers live in fear of central bank intervention. When the 10- and 30-year yields begin to rise the FED speakers discuss the increased possibility of YIELD CURVE CONTROL, or YCC, making it difficult for any type of signaling mechanism to develop.
The FED/TREASURY are as connected as the BOJ/MOF in Japan and it is all just the financing of government debt. Imagine the situation if interest rates were allowed to respond to market forces and rise in anticipation of increased DEFICITS? The interest expense of financing so much debt would mean the curtailment of many safety-net programs. This is Washington’s greatest fear for the political response would be devastating for the entrenched elites.
The question I posed to Louie Gave in the FRA podcast — which Rick Santelli also posed to Jim Grant in an interview last week — was this: If UNEMPLOYMENT IS 9% and INFLATION IS 6%, will the FED RAISE RATES?
If you believe the answer is NO then anyone purchasing a debt instrument beyond six months is a purveyor of Richard Dennis’s SLOWER FOOL THEORY. I will be able to exit my position before the other idiots.
This is the FORWARD GUIDANCE AS I AM OFFERING IT. The question for stock traders is and will be: How long can the salesforce on Wall Street ignore the underlying politics prevailing as we head into election season?
NOTES FROM UNDERGROUND always stresses the theory of a single spark to start a prairie fire. The stress from covid was the tinder, police malfeasance the spark. The movement in U.S. stock prices on Friday reflects the complacency in the canyons of WALL STREET.
The FED continues to prop up asset prices until the political platforms pop the bubble of complacency. Is that good for my portfolio?
***Critical news from last weekend: The Schaeubel PIVOT. While you were watching the Gave/Harris/Bonugli FRA podcast, the second most powerful political force in Germany provided support to the concept of a EUROBOND. Bundestag President Wolfang Schaeuble said he’d back the Merkel/Macron of a grant-based pool of fiscal capital to European economies suffering massive economic stress due to Covid-19.
He said, “The President opens and closes sittings, calls items of business and grants members leave to speak.” The Financial Times quoted Schaeuble, “If Europe wants to have any chance at all, it must show solidarity and prove it is capable to act. Germans have an overarching self-interest that Europe gets back on its feet.”
Schaeuble also noted that giving loans to debt-plagued nations was like giving them stones whereas GRANTS are tantamount to bread. The Bundestag president’s powerful legislative voice may be enough to gain the support of the German High Court and their concern that the ECB was circumventing the will of the German electorate.
The EURO rallied about 2% last week against the dollar even as U.S. equities seemed to be the recipient of myriad investors. But more importantly the EURO showed the impact of the SCHAEUBLE PIVOT as EURO strength was pronounced against the YEN and SWISS FRANC. The EURO was also able to close above the 200-day moving average at the end of the month.
In addition to the EURO strength, the yield spreads between Germany/France and Germany/Italy compressed. Schaeuble is a powerful voice for German conservatives and this pivot is not to be underestimated.
The road ahead for EUROPE will be fraught with all kinds of potholes as the FRUGAL FOUR raise their concerns over consolidated fiscal policy and debt. But the German voice is the strongest as it is the keystone of the European financial edifice. Investors may want some SACHERTORTE.
Tags: cheap money, Euro, Europe, Federal Reserve, Germany, U.S. stocks, Wolfgang Schaeuble
May 31, 2020 at 4:48 pm |
What we are witnessing in all the markets is The Truman Show. If you haven’t seen that movie or have, see it now or again. Because it describes the equity and bond markets in their make believe world. We on the outside looking at the set, can only smile, but a sad smile because we know how it ends.
Germany is no more able to stop the headlong move to the now ordained conclusion than the little Dutch boy seeing more leaks in the dam than the fingers he has. Schaeuble didn’t really pivot. He and the rest just have to keep dancing as the music gets louder and louder. Once the music stops, the Truman Show is over.
Yra you meant Apple Strudel. Sachertorte is native to Vienna. Both are tasty unless you overdo it.
May 31, 2020 at 7:12 pm |
Yra
I still don’t think the Fat Lady has sung about European debt mutualization. Stay tuned, my friend
May 31, 2020 at 7:54 pm |
My vote is Sauerbraten, nothing as sweet as Sachertorte nor even Apfelstrudel !
June 1, 2020 at 1:45 pm |
Both Asherz and Michael are right:
Schaeuble, while pretending to be financial conservative, always was one of the key architects of the “Save the Euro” movement, also known as “save the Kohl heirs’ collective behinds”.
This group, most importantly Merkel, have realized that after the German Constitutional Court’s judgement the European Commission is now the only entity able to save Draghi’s ‘whatever it takes’ policy and thereby the Eurozone in its current shape.
These cowards may be telling themselves that their treaty (namly Maastricht) violations are only for the benefit of the German people they have sworn to protect from harm – when it’s really obvious they are mainly interested in saving their own political legacies and reputations for as long as possible, ideally until they have left the planet. Admitting a mistake and correct it? Forget it – that’d take real character and class, and is beyond the capabilities of these minnows.
However…, their corresponding actions are such a blatant slap in the face of the German judges that I wouldn’t rule out some emergency legal action (by the groups who had sued the ECB) to stop this latest and so far most serious attempt at open debt mutualization to be successful in blocking it, at least in the short term.
Also the resistance of some countries, particularly Netherlands and Austria, will most likely result in at least a substantially watered down
‘deadbeat rescue’ – which would not not help those perma-beggars
for long.
June 1, 2020 at 10:05 pm |
Those whom the gods wish to destroy
they first make mad.
We are sadly watching the Madness of King Trump play out tonight as he asserts authority to send in the MILITARY to restore law and order.
I will veer away from political commentary, but will say this.
The economic havoc inflicted by the Covid lockdown has now metastasized into ACTUAL destruction of so many US cities with
riots, arson and looting taking place nightly.
To me, I think this RAGE will last until either the 4 Minneapolis officers are found guilty and imprisoned and/or Trump is voted out of office.
If McConnell and Pelosi could not before agree to at least a $1 Trillion aid package to the cities and states, now that figure could be twice as big as commerce in so many of our great cities could be halted for many more months due to the damage inflicted and the fear of anybody attempting to go to work, shop or “play” in these now shattered communities.
Powell was right when he said the DC pols needed to step up their game of fiscal aid/stimulus. After tonight’s performance by Trump, which will likely stokes these fires even hotter, even more $$ will be needed to sustain our cities.
We are witnessing “war scenes” nightly, as bad as any chaos we have grown accustomed to watching “over there” but not here.
Now, it is here. Comparison to 1968 may turn out to be too mild.
If so, does the US look like an attractive magnet for global capital?
Does the USD lose some of its almighty status as we devolve into ugliness that is some chilling combination of 1918 (pandemic), 1930s (Depression with tens of millions unemployed) and now 1968 when our cities exploded.
Do the gods wish to destroy the USA?
If so, they have certainly begun to drive us mad, beginning with our Dear Leader.
As it relates to markets, here’s the funny thing. I am not that much bearish on stocks.
Gold, on the other hand……We could be on the cusp of something parabolic
June 2, 2020 at 3:05 pm |
Protesters gone wrong. Not a great fan of revolutions.
June 2, 2020 at 3:48 pm |
Why is the Aus dollar gaining so much strength versus the Yen and USD?
I forgot who previously commented that this is a coming inflation indicator.
June 2, 2020 at 4:43 pm |
Pierre–in tonight’s blog I answer that but it is just a conjecture–there was no mention of recent Aussie Dollar strength so the market seems unperturbed by the recent rally–the overall statement was dovish
June 6, 2021 at 1:02 pm |
[…] crisis, Bundestag President Wolfgang Schauble wrote an opinion piece in the Financial Times, which I referred to as a pivot away from his well ensconced fiscal frugality. I said that the pivot was an important […]