Notes From Underground: Policy Trumps Data

The MISS by the economic analysts of Friday’s unemployment data has rendered all data as tertiary relative to the policy that has been enacted to counteract the malicious effects of the Covid-19 shutdown. Global stock markets have rallied as if normalization has occurred and UNEMPLOYMENT has returned to its historic lows of 3.5%.

The fact is, the unemployment rate by any measure is still at 13.3% (and this is before the negative impact from the political reactions to the most recent bouts of police brutality against society’s most underemployed, under educated and under served.) A couple of weeks ago Louie Gave and I discussed the high probability of political demonstrations this summer in response to growing frustrations from the SHELTER-IN-PLACE policies affecting the lowest rung of the service economy coupled with loss of demand affecting manufacturing and transportation jobs.

We did not discuss the catalyst but as always a single spark can ignite a prairie fire. Did the Wall Street rally this week represent the financial world’s knowledge that the FEDERAL RESERVE would be slow to curtail its massive liquidity injections (and insolvency prevention) because of the recent political acts of civil disobedience? If you listened to the recent FED LISTENS podcast you can be assured that the FED is HYPERSENSITIVE to the jobs situation for the lowest rung of the employment ladder.

The FED has been maintaining that its policies over the previous 11 years has proven so successful because it was bringing those who had been alienated from the labor market back into the workforce. (The great benefit of 3.5% unemployment.) In January 2019, Chairman Powell pivoted away from balance sheet unwind and interest rate hikes–Druckenmiller’s double shotgun approach–with unemployment at 3.5%. How long will the U.S. central bank and Congress pursue monetary/fiscal stimulus with unemployment at 9%?

Is the FED‘s dual mandate equal in their minds or is 9% unemployment more reprehensible than 9% INFLATION? This is the policy question that appears to be driving Wall Street higher and higher. As Mark Twain quoted Benjamin Disraeli: Lies, damned lies and statistics. The FED and fiscal policy in the face of political turmoil will trump them all.

***Last week the EURO performed well as the ECB did not lower rates but instead announced an increased in PEPP of 600 billion euros. It seems that President Christine Lagarde is willing to go further in stimulus, even risking the ire of the German High Court. Why? In my opinion it is because of the pivot of Bundestag President Wolfgang Schaeuble.

The moment that Herr Schaeuble decided that BREAD was more important than STONES (see May 24 blog post) the EURO and DAX have rallied while the European sovereign spread yields have compressed. The BUND/BTP differential has narrowed to 175 basis points from 260 basis points on Friday. At Lagarde’s press conference Thursday not one reporter asked about the Schaeuble Pivot.

President Lagarde was masterful though in laying out ECB POLICY citing that the increased purchase of pandemic bonds was being done to ease financial conditions and provide the central bank with FLEXIBILITY in directing where the liquidity is most needed.

She emphasized that a capital key was not going to be deployed, providing the ECB relief from the straight jacket of the GDP measurements. Lagarde also took on the German Court by stressing that the ECB deliberations always “reviewed effectiveness, efficiency and cost benefit of policies, thus always measuring PROPORTIONALITY.” The EURO had a strong week coupled with a sharp rally in the DAX. It is this EURO strength suggests there’s less concern about its existence, providing investors with an alternative asset to the DOLLAR.

The DOLLAR was under pressure all week even as U.S. 10-year yields rose 25 basis points. This would usually have the CNBC brigade claiming DOLLAR STRENGTH. I see it as more reason to analyze policy in the face of questionable data. The GOLD/EURO corrected, as well as all the EURO crosses but the EURO failed to close above its 200-week moving average. This will be an important pivot to be aware of in weeks to come. The recent strength in the EURO has also led to strength in emerging market currencies, which has provided support to global equity markets. Political turmoil has its benefits.

***This will be the penultimate blog post for awhile as my esteemed discussant takes some time to tackle a most important task: motherhood. I am still trying to see what would be the best way forward and am open to any and all suggestions. A daily half hour call in to discuss trades may be the best way to deal with the dynamism confronting all investors.

I leave you with this from Points of Rebellion by William O.Douglas: “The Streets of our country are in turmoil. The universities are filled with students rebelling and rioting. Communists are seeking to destroy our country. Russia is threatening us with her might and the republic is in danger. Yes, danger from within and without.We need law and order.” –1932, A.H.

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10 Responses to “Notes From Underground: Policy Trumps Data”

  1. Judd Hirschberg Says:

    I’m all in for a paid 30 minute session. You’ve made us all a fortune with your prescient views. Judd’s Room members have profited from your brainstorming sessions time after time.

  2. ShockedToFindGambling Says:

    I’m in on the 30 minute call.

    Last Friday, many of the recent stock leaders (XLF, KRE, JETS, IYT, XLI) closed near their lows…..something to watch.

  3. Yra Harris: Here is what's driving Wall Street higher and higher... Says:

    […] Continue… […]

  4. Richard H Papp Says:

    I am a grandpa of 6 ranging in age from 6 to 19 and having to deal with two daughters has taught me a lot. Every daughter, when confronted with the situation of birth, needs their mother. We are just excess “baggage” ( meant lovingly) and my advise is to follow the lead of your wife.

  5. david Says:

    Thanks for all your input. On a third-grade trader’s perspective, aren’t things a bit too optimistic out there right now regarding equities. I personally feel like this is what “they” were waiting for. Get everyone sucked in again and then dump it all over. I have friends who I would have never guessed they’d be putting money to work in the market that are touting up over 20%! I went short Thursday before the ESR and I’m sticking to my guns. The pattern of volume on continuous contract of ES over the past week has to me shown a topping pattern; whereas since the end of March up until then has shown very orderly volume.

    • yraharris Says:

      David–it really comes down to this —if you had 10 million dollars to invest and thought about just a 1 year treasury note to bide your time –would you put your money there—every decision has to begin with that question in the world of trading and investing

      • david Says:

        My last point and it’s to your question Yra, having 10 million…
        To be honest, I think I would take the safety and no return on treasuries than putting it to work and what I consider the most manipulated asset class out there – equites. At 35 years of age I’m looking out 10 years and my humble analysis tells me the market will move sideways and with far more downside risk than upside. The corona shock to me was the beginning of a decades long correction in equities; well overdue might I add. Therefore I have no holdings in equities and feel it’s a traders market for years to come! Don’t think can ride the upside wave like we have since ’08-’20.

    • ShockedToFindGambling Says:


      That’s how it looks to me.

      Seems like stocks are very expensive by any measure and investors are near euphoric.

      I’m not a great trader, but I was the #1 ranked CTA in the country for 2 years, so I know a little bit.

      You need to respect the market…..sometimes it gets and stays irrational…….put a stop in, somewhere.

      • david Says:

        great points to both of you, thanks for the advice. I’m keeping a close eye on oil too because that last run in equities seems to be driven by that.

      • david Says:

        Another little side – SP’s are back to the level where we were on Feb 25 when Trump was ridiculed for his “market starting to look very good to me,” comment. Well, we all know what happened after that, but here we are again at that level after a miraculous drop and recovery…Just seems to be an area of significance.

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