Archive for the ‘Central Banks’ Category

Notes From Underground: Putting Things In Perspective

December 5, 2017

Just a few quick points that are relevant to the markets at the end of the year:

1. Tonight I am including charts of the U.S/German two-year yield differentials. The U.S. two-year note is yielding 256 basis points above the German rate. This is relevant because both instruments are high quality assets that play an important role as collateral in the funding markets. I’ve also included a 25-year chart of the U.S. 2/10 yield curve. Note that the last two INVERSIONS occurred before significant equity market corrections. Does this current flattening portend a stock market correction? We can’t be certain because the role of the central banks has certainly created an investment environment where markets suffer from a lack of RISK PREMIA in all asset prices.

 

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Notes From Underground: An Arthur Fonzarelli Moment for Yra

November 29, 2017

Six weeks ago I did a podcast with Anthony  Crudele and Rick Santelli about markets. I brazenly said the S&Ps would experience a 10% break before a further 3% rally. The S&Ps were at 2550 and as of this morning the 3% has been actualized long before the 10%. My respects to Rick Santelli, who was right on target with his call to purchase all equity markets for the next period of time. In true FONZI ways, I was wrong. But I have been liquidating long-held stocks into this rally and will continue to do so as I view this 23% rally since the Trump election as a great gift. If I had predicted on November 9 that the S&Ps would be 23% higher a year later, you would have had me committed.

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Notes From Underground: A Podcast With Top Step Trader

November 21, 2017

During this thin holiday market as markets, it’s important to remind ourselves of the tools that are necessary to have in order to profit in the global financial markets. I had the pleasure to sit down with Eddie to reprise many stories that bring laughter but also knowledge of the markets. Please enjoy the podcast.

As far as Tuesday goes, the equity rally powers on and the yield curves continue to flatten, causing angst among many asset managers. But as the U.S. curves flatten the European curves are actually steepening, which is in contravention to conventional wisdom. The ECB is still building its balance sheet while the FED has actually begun shrinking its $4.5 trillion accumulated asset base. The U.S. curve OUGHT to be steepening while the European should be flattening. My opinion is that the emphasis is on buying the short end of Europe but forcing global investors to seek duration risk in the U.S. with its higher sovereign yields. Just last week, the European junk bond market was actually yielding less than U.S. 10-year Treasuries. I can’t stress it enough: The international market for pricing risk has been terribly distorted by the central banks. This is the environment we exist in for the business we have chosen. I will be on with Rick Santelli on Wednesday at 9:40am CST. Enjoy your Thanksgiving for anyone reading this BLOG has much to be thankful for. All the best, Yra

Notes From Underground: Klaatu Barada Nikto (Stop The Printing Presses!)

November 19, 2017

In this famous science fiction phrase from the movie “The Day the Earth Stood Still,” I extract my own meaning: Stop the printing before the world’s financial system is destroyed. Sci-fi writer Edmund North never deciphered the English translation of this “alien” phrase but I believe my interpretation applies to these tumultuous times in central banking. The ROBOT GORT is prevented from destroying the world when the words are spoken to him. Thus I say to Mario Draghi: “Mario Barada Nikto.” The continued use of large-scale asset purchases to enhance global liquidity in a period of increased economic growth is preventing the markets from stabilizing. The proof is in the continued mispricing of corporate debt. Last week, the BBB-rated French firm Veolia sold 500 million euros of three-year notes for -0.026%. Yes, a mediocre credit was able to borrow at less than zero. This is the insanity of the financial world to which the central banks continue to provide liquidity.

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Notes From Underground: An Answer to a Rohr and Chicken

November 7, 2017

As I noted on Sunday night we FINALLY closed below the 73 basis point level that has held for almost two years after several attempts to flatten through that support. The FED is in a difficult situation. Similar to the central bank openly stating that it doesn’t understand what is going on with the Phillips curve and lack of wage inflation, it doesn’t want to admit that the FLATTENING curve is due to the ECB’s ongoing asset purchases that is compressing yields. Some MOOKS maintain that it is a global savings glut but when you have printing how can you discern what constitutes savings and not just central bank intervention?

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Notes From Underground: William Dudley Starts Goodbye With a “Dud” Speech

November 6, 2017

As reported over the weekend, New York Fed President William Dudley is turning in his keys to the printing press and leaving the Fed in mid-2018 to spend more time with his family (Goldman Sachs). In a speech delivered to the Economic Club of New York, the reigning king of the New York Fed praised the central bank for its effort to prevent a collapse of the global financial system. He laid blame for the crisis on all the familiar miscreants but mostly stressed that “the safeguards put in place in response to the crisis are fully appreciated and respected.” President Dudley maintains that the global financial crisis was a result of lacking the tools to regulate the entire financial system and sums up his analysis: “We had woefully inadequate regulatory regime in place,and while it is much better now, there is still work to do.”

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Notes From Underground: An Assessment of Market-Moving Events (Or, Which Narrative is Most Critical?)

November 5, 2017

Three central bank meetings, the selection of a new Fed chair, the release of a major new tax policy and the unemployment report provided the markets with great potential for increased volatility. Instead the markets yawned and carried equities to new all-time highs.The central bank decisions went as expected; the unemployment was a bit weaker than projected but the weather problems from the hurricanes have probably not been fully tallied.

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Notes From Underground: Quick Note on the BOE and Friday’s Jobs Report

November 2, 2017

Today, the BOE raised interest rates (as expected). But the market deemed it to be dovish and the EUR/GBP rallied 2 percent as the British pound tumbled and the euro strengthened versus the pound and dollar. On Wednesday I cautioned that the EUR/GBP failed to hold below its 200-day moving average and this provided a good technical level. As expected, the FOOTSIE index rallied more than 1 percent as investors appreciated a weaker POUND as beneficial to British corporations regardless of Brexit. The initial release of the statement revealed a 7-2 vote, which on first read was not the expected 6-3 vote so could have been a bit hawkish. But the eight paragraph statement clarified the soft-side of Governor Carney:

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Notes From Underground: A Tale of Three Central Banks

November 1, 2017

The BOJ released its policy statement on Tuesday and it was as expected. The central bank sustained its yield curve control (YCC) policy as the BOJ seeks to ensure that inflation reaches its 2% target. The 8-1 vote by the Governing Committee was a bit dovish as one of the two new members, Goushi Kataoka, voted to extend the purchases further out the curve to prevent 15-year yields from rising. The bank will also have REITS and ETFS to buy if JGB supply runs short. Bottom line is that the NIKKEI made new 27-year highs and the dollar/YEN rallied as the currency gave up some of its recent gains against the U.S. and euro currencies.

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Notes From Underground: It’s Halloween and Nothing Scares the Markets

October 31, 2017

It has been a few days since the ECB announced its intentions. There was no surprise as President Draghi met market expectations by beginning a NON-TAPER, cutting QE by 30 billion euros beginning in January 2018. So as we considered the outcome of PACE and DURATION, the ECB cut the pace in half and extended the program by nine months to September 2018. The most significant piece of the Draghi press conference was his persistence on making the composition of future purchases. It seems that the ECB will utilize the European corporate bond market to meet its requirement and stay true to its CAPITAL KEY. By buying more corporate debt the ECB will find enough German assets to buy. The major problem for the European markets is that UNLIKE the U.S. financial system, European banks are a much more important actor as they provide far more corporate loans on a percentage basis of GDP than U.S. banks. The U.S. financial system relied to a far greater extent on issuing bonds. We have previously discussed the absurd chart showing European high yield debt to have a lower interest rate than 10-year U.S. Treasuries.

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