Posts Tagged ‘deflation’

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.”

(more…)

Notes From Underground: The Washington Redskins Should Change Its Name to the 37ers

September 20, 2015

Readers of NOTES FROM UNDERGROUND are aware that one of my major themes during the past six years has been Ben Bernanke’s pledge to Milton Friedman at MILT‘s 90th birthday. I’m paraphrasing, but Bernanke vowed the Fed would not make the mistakes of 1937 and raise rates in a period when fiscal policy was tight and monetary policy needed to be loose to sustain its velocity. In 1937 the combined policies of the FED and the Henry Morgenthau Treasury tightened together, which led to a renewed recession of the U.S. economy and a severe bout of renewed DEFLATION. It is the FED‘s and other central banks main thrust: To prevent a deflationary cycle taking hold. Bernanke is the ultimate 37er. For the FED, “whatever it takes” means inflation running hot so as to prevent any possibility of the LIQUIDATIONISTS and DEFLATION gaining a foothold in the economy.

(more…)

Notes From Underground: Santelli Exchange — A World Awash In Reserves

March 31, 2015

Yra With Rick Santelli on CNBC, March 30, 2015Click on the image to watch Rick and I discuss Janet Yellen’s March 27 speech.

Notes From Underground: The Even-More Complex Map of Currencies and Politics

March 29, 2015

On Friday afternoon Chair Janet Yellen delivered a speech at a conference sponsored by the San Francisco Fed, titled “Normalizing Monetary  Policy: Prospects and Perspectives.” Many analysts will delve into the speech to find a possible nugget of “forward guidance” in the predisposition of Chair Yellen’s desire to raise rates. After a second read and reviewing several pages of analysis, I am left with the same outlook of President Harry Truman: Please bring me a one-armed economist. The speech is filled with a back and forth on the desire to raise rates to a level of “NORMALIZTION” but with the headwinds facing the U.S. and global economies caution is to be maintained. The headwinds prevailing in the U.S. and acting as a drag on economic growth are:

  1. Tighter underwriting standards;
  2. Continued household balance sheet reduction;
  3. Contractionary fiscal policy at local, state and federal levels;
  4. Lack of capex for lack of robust demand; and
  5. Recent appreciation of the dollar is likely to weigh on U.S. exports.

Chair Yellen opines that if the FOMC waits too long it could result in higher than targeted inflation levels. The Fed Chair cites the recent experiences of Japan and Sweden as a reason to be cautious “… in removing accommodation until the Committee is more confident that aggregate demand will continue to expand in line with its expectations.” Also, with “… an already large balance sheet. For example, the FOMC might be concerned about potential costs and risks associated with further asset purchases.” It seems it is better to err on the side of what Fed President Dudley has referred to as the economy running “hot,” which is inflation being sustained above the 2 percent level.

In a post-Yellen comment, Rick Santelli noted that during the brief Q&A session the Fed Chair said unequivocally, “Cash is not a very convenient store of value.” Santelli said this is the bogeyman of deflation and Gillian Tett picks up the argument in the weekend Financial Times with a piece, “How Deflation Gave Lower prices A Bad Name.” Readers of Notes from Underground have known that I refer to Ben Bernanke as a ’37er: An economist grounded in the belief that the early moves by the FED and the U.S. Treasury to prematurely tighten fiscal and monetary policy in 1937 led to a stifling of incipient growth and a renewed recession. “Cash is not a very convenient store of value” certainly signals that the Yellen Fed will keep rates as low as possible in order not to abort economic growth.

It has been my argument that the reason GOLD maintains its long-term strength is because of the fear of deflation and the policies employed by central banks to curb the possible threat of falling prices. In a continual effort to combat DEFLATION the world is awash in reserves, which presently support global equity markets. (It appears as if stocks are presently a better store of value than gold.) But as Tett wrote in her piece, falling prices are not always the BOGEYMAN of capitalism. Deflation is only a grave concern when an economy has accumulated for too much debt and then the fear of asset deflation brings about the asset liquidation of the 1930s and all the societal pain.

I believe the Bernanke Fed was correct in employing the first round of QE for it forestalled a massive round of asset liquidation in a very fragile financial environment. It is the continued use of QE that has created potential problems for the FED. Yes, I know as Senator Schumer proclaimed, “You are the only game in town.” I guess after reading the Yellen speech it appears that the Fed will remain data dependent but, more importantly, an aggressive easing of fiscal policy might be the real impetus for the Fed to raise rates. The ’49ers play in San Francisco while the ’37ers  dominate the Washington monetary scene.

***Global Politics — The news from the Middle East last week sent momentary scares into oil, precious metals and stock markets. The military response by the Saudis and a possible Sunni coalition of armed forces to recent events in Yemen was seen as a precursor of a new flash point in the already tense ME. By Friday, the oil markets sold off and the precious metals were in retreat as the conflict in Yemen was seen to be contained. IN MY OPINION THIS MOVE BY THE SAUDIS IS NOT TO BE MINIMIZED. WHY? If you look at a map of Yemen and its relationship to Saudi Arabia, and, of course Iraq, you will notice that both countries border the House of Saud. The Saudi family controls something greater than oil reserves. It controls the Islamic Holy Sites of Mecca and Medina.

The desire by Isis to rebuild the Caliphate necessitates the need to control the pivotal centers of the Muslim religion. While Isis is Sunni  the rebels in Yemen are a sect of SHIA and it is their Iranian support that causes the Saudis and other Arab states to militarily act to counter the perceived threat to the Saudi homeland. I have long believed that Mecca and Medina are the desired targets of any group or nation desiring to control the center of Islam. Those believing that Yemen is only about the control of Mandab Strait or Bab el Mandeb are fooling themselves. Yes, a choke point of oil transport is important. More than 3 million barrels of oil daily flow through the strait as crude moves to the Red Sea and out to the Mediterranean by way of the Suez canal. Yet there are also important elements in play in the struggle between Sunni and Shia.

In Friday’s FT, Richard Haass, President of the Council on Foreign Relations, wrote: “There are other reasons to predict limits to what the Saudis can be expected to do in Yemen. They lack much in the way of capable ground forces. Saudi arabia also has to worry about the home front. It is only a matter of time before it faces direct challenge from groups such as the Islamic State of Iraq and the Levant who will see ousting the government that controls the two holiest cities of Islam as essential to their ambitions.” If you believe the world is getting easier to decipher, think again. You need more than an MBA to know which way money will flow. The world is caught in the imbalances of 2+2=5.

***NOTE: I will be on with Mr. Santelli tomorrow morning at 9:40am Chicago time. I don’t know the topic but as my readers know, we’ll be prepared to go many places.

Notes From Underground: The Washington Redskins Should Change Their Name to the Washington 37ers

September 23, 2014

Just a quick note in the run up to the beginning of the Jewish New Year. A happy and healthy new year to all the readers of Notes From Underground. May your year be blessed with less turmoil both on a micro and macro level. For all my readers no matter what faith or no religious view: May we all find peace and have the wisdom and grit to prosper. Best Wishes, Yra.

This title is a tribute to the recent movements in the world financial and commodity markets. The “strong” dollar has been attributed as the dynamic factor pushing commodity prices lower and creating the environment for potential DEFLATION around the world. Emerging markets are under pressure as raw material prices drop and the fear of rising U.S. interest rates are combining to generate outflows from Mexico, Brazil, Turkey and many others. Europe is struggling to create any growth as even the EU‘s great locomotive, Germany, is beginning to feel the pains of its growth-constrained neighbors.

(more…)

Notes From Underground: How Do Markets Test the FED?

June 23, 2014

In following up on the theme of the last three blog posts, it’s always a question how  markets test central bank policies. As is frequently mentioned, when investors fear that central banks will err on the side of LIQUIDITY EXUBERANCE precious metals and hard assets are bought in efforts to prevent the POSSIBLE EROSION of asset values. In times when the market perceives the FED to be ahead of the inflation curve, investors buy long-term bonds and lock up higher rates in a belief that an aggressive Fed will successfully slow the economy. Thus, locking up high rates now will generate a higher real yield as the economy begins to slow, resulting in a flattening of the yield curves. When the Fed is deemed to be behind the curve, investors sell long-dated debt in belief that the FED will at some point have to aggressively raise rates to stem incipient inflation, resulting in a steepening yield curve.

(more…)

Notes From Underground: Pritchard Raises An Important Issue– Is China Exporting Deflation?

April 24, 2014

The equity markets were gaga over the news from Apple and Facebook and trying to push through March’s highs when Twitter was busy raising the issue about a possible Russian incursion into Eastern Ukraine. The “breaking news” failed to gather strength and the markets were soon back into positive territory. Just as the equity markets were absorbing the Russian rumors, the precious metals were making recent lows on the back of stock market strength and better economic news from the U.S. For all you technical-oriented market watchers, the gold and silver both put in outside reversal higher days so we will watch to see if there is any follow through in the metals market tomorrow.

(more…)

Notes From Underground: Mario “Act Swiftly If Need Be” Draghi

April 3, 2014

Our man in Frankfurt did not disappoint today. He was at his best as he kept the “unconventional tool” of negative interest rates in his bag of tricks. Again, the ECB President did not need to expand one euro to achieve a positive outcome. The euro rallied for a brief minute as the report came that the ECB announced “NO CHANGE” in policy. However, as traders we noticed that it was the smallest rally as market expectations were wrong. The EURO  remained offered all day once the press conference began and Mr. Draghi announced that the meeting was unanimous in its approach to the use of unconventional tools to combat the UNDER UTILIZED CAPACITY IN THE LABOR FORCE AND THE THREAT OF DEFLATION. The ECB went through his usual litany of reasons as to why the European economies remained with an output gap and subdued inflation: lower energy and food prices, plus the fact that the coming asset quality review was keeping banks from lending. The ECB is aware that bank lending is much more important to the European economy than in the U.S. as the American corporate bond market plays a much greater role in finance.

(more…)

Notes From Underground: Mario Monti Is No General Sherman

December 23, 2012

Over the weekend Mario Monti decided not to run for the Prime Minister position through joining any party’s list for the election to be held in February. Mr. Monti was never elected to his present position but was parachuted into the job by the Eurocrats in Brussels. It seems that PM Monti fears facing the electorate as so many Italians are angered by the slash-and-burn techniques of the supreme technocrat–both left and right have criticized the present Monti government. Monti resigned after Silvio Berlusconi pulled his support from the Monti regime, but now it appears that Berlusconi would renew his support for a Monti-led coalition. The dramatic fall in bond and stock prices following Monti’s resignation caught the attention of the monied groups in Italy.

(more…)

Notes From Underground: Did You Hear What I Hear, Senator Schumer

November 20, 2012

In his speech at the Economic Club of New York, Fed Chairman Ben Bernanke said: “Monetary policy can do little to reverse the effects that the financial crisis may have had on the economy’s productive potential. However, it has been able to provide an important offset to the headwinds that have slowed the cyclical recovery.” While Mr. Bernanke stayed quiet about Washington’s role in easing the potential fallout from the “fiscal cliff” during the election, he was very direct in letting the administration and Congress know that they are now the most important “game in town.” The Fed chairman was very clear about the potential economic drag that will result from the Congress letting previously enacted stimulus programs lapse. Bernanke voiced concerns about the impact of cuts in local and state spending and the massive job layoffs at the local government level–600,000 jobs were supposedly lost by cuts in state and local budgets. If the Federal government goes over the fiscal cliff, the unemployment impact will even be more dramatic.

(more…)