This week has presented us with THREE central bank meetings. The results of the BOJ, FED and BOE meetings were no change to the current policies. So, with inflation on the rise and equity markets close to all-time highs for the U.S. and multi-year highs for Europe, the overseers of credit feel no need to tighten monetary conditions. Chair Yellen and her fellow decision makers are evidently comfortable that the wheels of legislation grind slowly and will wait until there is some evidence of fiscal stimulus and tax reform before applying the brakes to a possibly overstimulated economy. The BOJ was cautious ahead of Prime Minister Abe’s meeting with President Trump. To understand the domestic politics of Abe’s possible bilateral deal with the U.S. I am linking to an article from the Asian edition of the Wall Street Journal by Tobias Harris (my progeny).
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Let’s be clear about the unfolding political and economic landscape: It is the desire of the Trumpians and the anti-Trumps to control the political dialogue. The media is putting President trump and his appointees under a microscope, which is what the press should always be doing. (My apolitical belief for the fourth estate is that a free press should be responsible in pursuit of the “facts,” but if they have a bias it should be “to afflict the comforted and comfort the afflicted.”) In my opinion, during the past 20 years the U.S. press has devolved into a sycophantic mob as everything becomes about access to those with the greatest celebrity status, which usually means wealthy. The financial media especially bows to the rich because if you are a billionaire your views go unchallenged for fear of being shunned as it undermines the concept of, “if you’re rich, they think you really know.”
Every step I take, every move I make, I’ll be watching the DOW hit 20,000. As I’ve said before, it is insignificant as we enter 2017, the year of political uncertainty with massive amounts of global debt. The Financial Times published an article today titled, “6.6 Trillion of Debt Issuance, Borrowing Levels Beat 2006 Mark.” The world has been taking advantage of the ultra-low borrowing rates that the ECB, BOJ, BOE and the Fed have so thoughtfully accommodated the global financial system. Corporates and sovereigns have been issuers while pension funds, insurance companies and central banks have been buyers of the poorly valued risk. If U.S. rates actually sustain a rise in yields, the headwinds from bloated balance sheets will hampered the slow-growth global economy. This will be a theme that is far more important than the slow grind of the U.S. legislative process, which will impede the Trump express. The Democrats will fight rearguard actions to prevent Trump’s plans for tax cuts and deregulation from coming to fruition.
The world is fraught with troubling news of assassinations, terrorist atrocities and confrontation between China and the U.S. But in the financial news it is all about the DOW PUSHING 20,000. To quote Mr. Natural: “What does the Dow 20,000 mean? It don’t mean SH*T.” We become enamored with numbers but in real financial terms 20,000 is meaningless on its own. The U.S. equity markets are enthralled with the possibilities that a Trump presidency will present. Three weeks ago Rick Santelli laid it out very well. He noted if trump was successful in reforming the ACA, realizing genuine corporate and personal tax simplification and reform, and rolling back some of the regulations burdening small and medium businesses the Trump administration would be an unmitigated success. If the Dow is the barometer, then Mr.Trump should declare victory and spend the next four years writing his autobiography.
My appearance with Rick Santelli on CNBC picked up on last night’s blog post. We discussed our concerns about the 7-3 vote in which the Fed Governors bested the Presidents. The FOMC has proven to be horrendous forecasters as Larry Summers suggested in his Washington Post op-ed in which he called out Yellen for her speech at Jackson Hole. Comparing Yellen’s forecast to Bernanke’s horrendous outlook on the housing crisis containment in 2007 was a tremendous insult. It seems that the Magnificent Seven have circled the wagons in defense against the ubiquitous criticism being leveled at the world’s central banks from fellow academics, traders, and pension and insurance companies. There was an interesting headline by Bloomberg that summarized Yellen’s press conference: “Yellen: Rich, Deep, Serious Intellectual Debate Today.” The intellectuals prevailed within the walls of the world’s most important debating society. The outcomes from central bank policy will make the fourth quarter a land of great trading opportunity. Do not be short volatility on a middle-term basis. The investment world is sitting on the tinder of multiple prairie fires. Which spark will light the tinder?
Over the weekend there was a new and improved G-20 communique, which was supposed to offer reassurance that the primary economic decision makers have things under control. It is disconcerting that so much time was spent discussing the global uncertainty posed by BREXIT for the global equity markets have deemed the British vote to Leave the EU as non-event (at least for now) and maybe even a positive for the Davos elite to adjust previous policy decisions. It appears that some G-20 members look forward to dealing with the U.K. on trade issues outside an EU establishment that is reticent to foster trade agreements because of German and French elections scheduled for 2017.
There were two articles today that exist in direct contradiction to each other in substance, but when taken together reveal how ECB President Draghi and IMF Director Lagarde HOPE to punish and repress the German saving class in an effort to salvage the EU via the alleviation of debt owed by the so-called peripheral nations. The first article of significance is an op-ed piece by the FT’s Wolfgang Munchau titled, “Draghi, Schauble and the high cost of Germany’s savings culture.” The article lays it on the line that the Germans bear a great deal of responsibility for the ECB’s negative interest rate policy because of Chancellor Merkel’s push for austerity budgets to correct the massive deficits of the heavily indebted “peripheral” nations of the EU. The Germans were pushing themselves into AUSTERITY simultaneously by pushing forward a law on its own BALANCED BUDGET RULE. The battle cry from Germany was growth through austerity. In July 2012, when the debt plagued EU was on the verge of financial collapse, the profligate peripherals were willing to accept any demands put forward by the Germans in an effort to gain access to the Berlin credit card. As Munchau notes: “If German fiscal policy had been neutral during that period, the ECB’s job would have been easier. It would have been able to achieve its inflation target and would not have had to cut rates by as much.”
Today the Fed delivered as expected, leaving rates unchanged and the market conjecturing about the sincerity of the FED’s data dependency (again). Some analysts and algo readers initially thought the FOMC statement was “hawkish” because the FED removed most of the rhetoric about the headwinds of international global and financial developments. I say most because the Fed left in “net exports have been soft.” This is either a concern about the lack of global growth and/or an overly strong U.S. dollar. It is MY OPINION that the Fed removed the language about international financial risks as an offering to the HAWKS as a way to get consensus.
Jim Bullard? Now There Is An Unsavory Chap
Today was not like the other days for the break in the equity markets came early. As all the global markets were in sell mode St. Louis Fed President James Bullard hit the airwaves with thoughts about being wrong in his inflation projections. It appears that the selloff in crude oil is providing the Fed hawk with concerns that the SUMMARY of ECONOMIC PROJECTIONS may be softer than the December FOMC meeting revealed. Bullard sounded as if he would not be in favor of the Fed raising rates because of the inflation rate turning away from the spurious 2 percent mandate. The unsavoriness of Bullard’s comment is not that he fears a downturn in inflation, and maybe lower growth, but that Bullard seemed to find his DOVISH posture as the U.S. markets were heading toward the August lows. Bullard in unsavory because he called out CNBC’s Jim Cramer for “cheerleading for low rates twenty-four hours a day.”
Now that the effects of 3-D and IMAX have worn off, I shared what is becoming a tradition: An interview with Rick Santelli. In the past, Rick has asked me for some of my predictions for the coming year. As a market participant who holds the power of market forces in high esteem and disdains models as all-knowing, it is difficult to find narrow based foreseen outcomes. Last December, Rick and I discussed the Swiss National Bank making some move prior to the January 22 ECB meeting. The SNB did make a move on January 15 but I was certainly not prescient enough to call for a 40 percent overnight move in the EUR/CHF cross. (Though I did warn blog readers that the SNB’s failure to levitate the EUR/CHF cross off the 1.20 floor with massive amounts of euro buying was a cause for concern, so readers of NOTES were not caught short Swiss Francs and certain readers were long the Swiss cross.)