Notes From Underground

On Friday, there’s a new dose of unemployment data. While these blog posts have been infrequent, my view remains the same: The Federal Open Market Committee may be keen on promoting inflation while returning to the pre-Covid employment levels, but no amount of robust jobs growth will move the FEDERAL RESERVE off its current policy of lower for longer.

In regards to the year-end data, I want to know: If unemployment is below 9% while the annualized inflation levels were to rise to 6%, would the FED raise rates? If your answer is no then you agree that the data outcomes are benign. At this juncture much more concerned with the next phase of fiscal stimulus and the DOLLAR.

[WARNING: The following observation is not political, but a look at the financial ramifications of recent newsworthy events.]

Until Trump’s attempt to imitate Bobby Heenan’s role with his decorum at Tuesday’s “debate,” it seemed as though House Speaker Nancy Pelosi was stuck and was going to bend to Treasury Secretary Steven Mnuchin and White House Chief of Staff Mark Meadows and accept a much lower covid relief package with far less aid for states and municipalities, the especially those in the so-called blue states. The DEMS were also pushing for some relief from the the 2017 TRUMP SALT change. Pelosi wanted to prevent the lack of state and urban revenues from leading to massive public sector layoffs.

It seemed that Mitch McConnell and company were going to prevail until the president failed to be presidential and allowed his bluster to make Joe Biden a sympathetic opponent. By shouting over Biden, Trump prevented his challenger from responding with any deep context. The desire to ride roughshod has allowed the Democrats to seize the upper-hand in the covid relief battle. Pelosi knows the Republicans need a deal in order to remove some of the stain from the White House and be able to get on with the Supreme Court nominee.

The proof is in the FACT that McConnell and the White House may have alienated Senator Tim Scott, a rising star in the Republican Party and an important voice of pragmatic policy making. Also, Senator Scott is a key link to Black conservatives. Instead, the president scolded Joe Biden that elections have consequences (but so does uncontrolled narcissism). The outcomes may be your election but for NOTES FROM UNDERGROUND the critical effect is on increased fiscal stimulus. It must be nice to play with other people’s money in an effort to assuage your ego.

In regards to the DOLLAR, much has been written about the COMING RALLY in the U.S. currency. We at NOTES FROM UNDERGROUND have been bearish the DOLLAR since German Wolfgang Schaeuble’s May 24 PIVOT on German acquiescence to European covid relief. As Schaeuble maintained, EUROBONDS in the form of grants to distressed economies would be like giving bread while only offering LOANS would be providing stones since they would be weighed down by further debt.

The concept of a harmonized EURO debt instrument provided relief from the existential fear of the currency’s demise. As a result the EURO rallie, which brought down the entire DOLLAR INDEX. The lower DOLLAR was deemed a positive for the global financial system as emerging market and commodity currencies rallied on the notion that a lower dollar would act as a stimulant to global markets. This would spark an upward move in commodity prices and hopefully stimulate the inflation that the world’s central banks are all pursuing.

The massive DOLLAR debt overhang needs a weaker U.S. currency to provide relief for sovereign or corporate borrowers that need of money to meet debt payments. The FED will not speak about the DOLLAR but a weaker dollar would be a needed tool to assist its drive for ever higher inflation. The flip side is that those warning about a TOO STRONG EURO miss an importance NUANCE. A stronger EURO reflects the idea that Europe and President Lagarde may be embarking on the correct policies.

Currencies are not always about ATTAINING A TRADE ADVANTAGE. At times the financing implications for the role of the RESERVE CURRENCY outweigh any lagging effects of trade. Do your technical work to see where the battle of DOLLAR BULLS AND BEARS is going to be fought.

The continued rally in the precious metals points to the FED‘s need for a weaker currency. If the DOLLAR were to rally I believe the central bank would move to enact YIELD CURVE CONTROL (YCC), something Chairman Jerome Powell seems reluctant to even mention since his Jackson Hole speech in August.

***Two pieces of information: First, below is a link to a podcast with Peter Boockvar recorded on September 17. Although the news cycle moves pretty quickly, Bonugli’s questions and Boockvar’s prescience means it’s still relevant.

Click here to listen to the podcast.

Secondly, October 1 marks the U.S. release of my son Tobias’s book about Japanese Prime Minster Abe Shinzo. It is a well written book and helps people in the financial word to attain a deeper comprehension of the Japanese political economy. Anyone in search of a deeper understanding of the world would benefit from adding this book to their library.

Tags: 2020 U.S. election, covid-19, Euro, Federal Reserve, fiscal stimulus, inflation, Jerome Powell, U.S. Dollar, unemployment data

This entry was posted on October 1, 2020 at 7:08 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.