First, why was Janet Yellen summoned to the White House to meet with President Obama and Vice President Biden? The most ostensible reason is PROBABLY to get the Fed’s view on the economic impact of Trump and Bernie Sanders. Is the anger in the land a result of stagnant wages and is there any policy impact the White House could pursue without distorting the economy? Is fiscal stimulus a possible positive response and would the Fed be receptive without immediately raising rates? There are no certain answers to why Yellen went only conjecture. But one thing that caught my attention was the headline in today’s Financial Times: “Lew Urges IMF to Get Tough on Exchange Rate Manipulators.”
Posts Tagged ‘Dollar’
It was a very big weekend for information leaks that many in the world of policy making did not wish to have spread across the globe. The noted economist Arthur Okun posited that there was a trade-off between equality and inefficiency when it came to providing a social safety net for those suffering from the capriciousness of a capitalist system. In an effort to minimize the economic dislocations of a market economy, the redistribution of wealth through transfers was compared to a leaky bucket in which not all the money would make it to the intended recipients. Okun also posited that in an effort for some amelioration of the pain of economic dislocation taxes on the most successful actors would result in an effort to avoid any wealth confiscation through progressive taxation: “High tax rates are followed by attempts of ingenious men to beat them as surely as snow is followed by little boys on sleds.” (Library of Economics and Liberty)
First quarter is winding down and after a great deal of volatility it is time to reflect on the markets. The SPOOS are virtually unchanged while the Nasdaq 100 is down 5%, the Nikkei is down 10% and the German Dax is down 8%. The global equity markets have been riding a wave of liquidity for a long while but with the aggressive QE programs from the ECB and BOJ the first quarter one would expect the German and Japanese stock markets to have been the star performers. Maybe more QE is losing its power to impact the markets? The DOLLAR INDEX is lower by 3.2%, which is also in contravention of conventional wisdom as QE is done to weaken one’s currency in an effort to aid the domestic economy. In examining the individual currencies the euro is +3%, Swiss franc +3%, yen +8%, Canadian dollar +5% and Aussie dollar +3%. Yes, the easing banks have seen their currencies strengthen against the DOLLAR.
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.
This Sunday begins the Jewish Holiday of Rosh Hashanah, which brings on a very solemn 10-day period of deep introspection as God judges the entire world for the coming year. So a very happy, healthy and prosperous year for all readers of Notes From Underground. Following the Monday and Tuesday’s days of reflection we come to the financial market’s judgement day, the Fed’s decision on interest rates. Let’s be as patient in reacting as the FED has been in raising interest rates. Will the FED act to raise rates and disregard all its fears of market turmoil? The FED has a poor history of making firm decisions in the face of creating violent market reactions. The Bernanke Fed failed miserably in an attempt to end QE, cowering in the face of the “taper tantrum.”
The FED‘s upcoming FOMC meeting (September 16-17) is resembling the theatrics of the Greek debt crisis: Opinions abound about what do to and the entire world has voiced concerns about the outcomes from whatever decision Chair Yellen decides. The media is filled with articles advising the Fed to raise/don’t raise. However, we’ve come to the point, JUST DO IT. Unlike Nike, there will be no victory.
In late April I wrote a blog post titled, “Why Bill Gross Is Right and Wrong.” I noted that Bill Gross’s call on selling German bunds was inherently correct but the French OATS–the French 10-year note, would be the more profitable sale. The yield differential at the time was 23 basis points but with the news out of Europe on Friday, the differential widened to 38 basis points. The area of concern for me is that with Germany maintaining twin surpluses–trade and budget–the ECB QE program would enhance the demand for German assets in a world of diminishing supply. The French budget and current account deficits, as well as a trade deficit, means the underlying fundamentals of the French economy are much weaker than Germany’s.
The results of the FOMC meeting: Ray Dalio–1, Janet Yellen–0 (h/t KM). It seems that the FED is fearful of upsetting the Dalio apple cart by raising rates and possibly tipping off a sell off in global assets. As I wrote on Tuesday, the walk back of taking the “patient” off the respirator would result in a DOLLAR selloff as long dollar positions were hopeful of an unequivocal position statement from the Fed on a near-term interest rate increase. Notes From Underground believed the FOMC statement would remove patient from the release and then Yellen would defang the hawks by being cautious about the strong dollar and continuing concern over the lack of wage growth in an economy with improving employment metrics.
The FED is on the record as being patient as it tries to achieve its dual mandates of full employment and an inflation rate of 2 percent. In the December 16-17 FOMC release, it said the “… Committee expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.” While the FOMC statement made no direct mention of the DOLLAR’S STRENGTH, the release of the MINUTES revealed that the dollar had been discussed in reference to inflation. The minutes said: “Participants generally anticipated that inflation was likely to decline further in the near term,reflecting the reduction in oil prices and the effects of the rise in the foreign exchange value of the dollar on import prices.”
The Bank of England’s chief-economist had the line of the month in his response to the disinflationary forces confronting Europe and the U.K. It seems that the G-20 did yield much more discussion about Europe’s economic malaise than was revealed in the communique. BOE Governor Mark Carney was warning of stagnant Europe being a drag on the global economy and impacting British growth. Even the economically challenged British Prime Minister David Cameron warned of flashing “red lights” on his economic dashboard. The last inflation data from the BOE revealed that inflation has fallen below its target and the lack of growth in its largest trading partner, the EU, threaten to push inflation lower than previously expected.