Notes From Underground: The More Things Stay the Same, the More the Headlines Change

September 14, 2017

The BOE held true to consensus and kept rates unchanged and maintained its balance sheet at 435 billion pounds, with the votes were exactly the same as the August meeting. The POUND fell on the initial headlines but the algos reversed as it was reported that there MAY be a need to raise rates due to the lessening slack in the economy. Governor Carney is reading from the Mario Draghi book, “Rules For Central Bankers.” He cited Brexit as the cause of a supply shortage because of reduced investment into the U.K. Wow! This is nonsense as stagnant wages are limiting domestic demand but Carney insists the negative fallout is constraining supply. With interest rates at record lows British firms could borrow all the cash they need to finance expansion. Carney needs BREXIT as the cover for his massive error. Remember when he panicked and cut rates following the BREXIT vote?

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Notes From Underground: The Bank of England Reveals Its Decision

September 13, 2017

Thursday, the Bank of England will reveal its most recent interest rate decision. The consensus is for the BOE to leave its overnight interest rate at 0.25%. There is interest in this meeting because the British inflation data has risen and is now above Governor Mark Carney’s desired target. The most recent inflation data released on Tuesday sent GILT yields higher and put a strong bid to the British pound, pushing it to levels against the U.S. dollar unseen since the BREXIT vote. The EURO even lost ground to the British currency as the market NOW ASSUMES that the BOE will have to move to raise rates in response to rising price pressures.

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Notes From Underground: Is Macron a Moron?

September 12, 2017

On September 7, I had the pleasure of chatting with Richard Bonugli of the Financial Repression Authority, covering topics previously discussed on Notes From Underground. The podcast allows for a much deeper analysis of topics covered here (and usually over a shorter span). Enjoy the conversation, and, as usual, please follow-up with questions so we can all benefit from the intelligence of Notes From Underground readers.

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Notes From Underground: A Take On Mario Draghi in Two Parts

September 10, 2017

Part I: Mario Draghi, the master of obfuscation was at his best Thursday as he dodged MULTIPLE questions about the recent STRENGTH in the euro. Journalists were very well prepared and even threw back Draghi’s previous responses about how a 10 percent currency appreciation would lower inflation measures by 0.5 percent. But Draghi met each question with a, “Yes, we discussed it as some members of the ECB Board were concerned about the EURO and its impact on exports and import prices.”

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Notes From Underground: Fischer and Cohn, Out; Draghi In (the Spotlight)

September 6, 2017

In keeping this note as short as possible, let’s start with Vice Chairman Stanley Fischer’s resignation. I am posting snippets from the August 20 entry, in which I noted the great piece in the Weekend Financial Times with its Stanley Fischer interview. The article noted the one open disagreement with Chair Yellen in which he was miffed about not being consulted about an FOMC decision. We don’t know if Stanley Fischer is resigning because of health reasons, personal issues or over policy disputes. But this I am sure: Lael Brainard has been elevated within the group of Fed Governors as she is the confidant of Chair Yellen, thus the FED takes a dovish stance. In her dovish speech she maintains that while desiring to keep FED FUNDS steady there is room to initiate some of the balance sheet unwind. This was also her stance in June when she presented arguments for QT versus raising the fed funds rate. The impact from the initiation of Boockvar’s QT would not be as great on the U.S. dollar.

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Notes From Underground: When Fed DOVES Coo

September 5, 2017

The FOMC doves were out today. Governor Lael Brainard and Minneapolis Fed President Neel Kashkari weren’t enough to prevent a selloff across global equity markets. The weekend brought louder noises from North Korea as Kim Jong-un revealed that the country had the wherewithal to place a thermonuclear warhead on an ICBM. In an effort to enhance the rhetoric it appears that the state detonated a thermonuclear explosion as radiation levels were elevated and a minor tremor registered on seismographs in the North Asian region. The world is on edge as the United States, China, Russia and the United Nations decide how to deal with the “rogue” nation, an irrational actor in a rationally modeled world. Maybe economics is not the only dismal science?

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Notes From Underground: Laboring to Comprehend Gary Cohn’s CNBC Interview

September 3, 2017

CNBC promoted its interview with Gary Cohn for a couple of days so the head of the White House Economic Council could not have been caught off guard by any questions from the interviewers. Cohn was giving the recent unemployment data a positive spin, but that’s part of his job description. MY PROBLEM WITH COHN’S INTERVIEW WAS HIS PUSH TO CUT CORPORATE TAX RATES AS AN ANSWER TO FLAT WAGE GROWTH. His analysis that lower tax rates equals higher wages is preposterous and reflects the thought process of a Wall Street account executive. In response to David Faber’s query about the tax cut benefiting middle class workers COHN replied: “How does it not benefit the worker?” Cohn answers his own question by building the straw man argument: Any repatriation of foreign profits would boost equity prices as would any cut in domestic corporate taxes. For who owns most of the equity in the world today (another Straw Man by Cohn)? We know the biggest pool of owned equity are the pension funds, especially the public pension funds (fire, police, teachers municipal workers], “… thus we are helping Americans by delivering returns back to them.”

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Notes From Underground: The Unemployment Data? I Suppose It’s Meaningless

August 31, 2017

It’s the first Friday of the month so that means we will have the jobs report at 7:30 CDT and 7:29:59 if you are a high frequency trading operation you do the math. Consensus is for 180,000 non-farm payrolls and the overall rate remaining unchanged at 4.3%. The most important piece is the average hourly earnings (AHE), which is predicted to be 0.2% which is lower than the July data. Regardless, with the economic impact from Hurricane Harvey still an unknown the FED will be kept from raising interest rates at its September meeting. But if the AHE is strong the FED may move to commence shrinking its balance sheet because Lael Brainard has already informed us that the FED analysts theorize that QT has far less economic impact then a RISE in the fed funds rate.

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Notes From Underground: Missiles Over Hokkaido

August 29, 2017

First of all, no matter what analysis we do it always pales in light of the human suffering that natural disasters bring upon people around the world. I am fortunate to be in a dry room, with warm clothes, food and, of course, an internet connection. It is often said that water is far worse than wind when it comes to the impact of hurricanes and typhoons. The human misery that deals with 40 inches of rain in a three-day period makes our prayers go out to all those affected by the devastation. Stop and take an inventory of the blessings we have on a daily basis. Houston, we can hear you.

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Notes From Underground: Arthur’s Song, Lost Between the Moon and New York City

August 28, 2017

A long-time reader of Notes From Underground posted a comment to a previous post promoting long GOLD/short YEN. When I asked him about this trade he noted the onset of currency wars. There is no question, as I have regularly shown that many foreign central banks’ currency’s strength is a reason to maintain very low interest rates and if in place QE programs. I certainly agree with Arthur about this narrative. But from a relative value perspective the Japanese yen has already benefited from its weakening versus the EURO, Aussie, Kiwi, Canada and Swiss franc.

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