Notes From Underground

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.

Tags: central bank stimulus, Christine Lagarde, ECB, Euro, Federal Reserve, fiscal policy, Jerome Powell, U.S. Dollar

This entry was posted on June 6, 2020 at 5:48 pm and is filed under Currency, ECB, Fed. 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.