IT DON’T MEAN SHIIIIITTTTT.
Let’s put aisde all the nonsense. But I will offer this: The average hourly earnings are going to begin to take on increased significance as the energy sector begins a massive shedding of HIGH PRICED jobs. Also, many other high priced employees are going to be losing work so the data is going to reflect a hit to consumers not only through the loss of jobs but from the destruction of HOURS WORKED by high income earners.
ECB President Mario Draghi has been able to convince the world that the Euro’s problems have been contained and it is safe to re-enter the financial pool of credit assets throughout Europe. The July 2012 speech that proclaimed the ECB had no taboos and would “do whatever it takes” to preserve the euro has been a masterpiece of doing nothing while generating the desired outcome. The master plumber of all things credit (JA) alerted me to the ECB’s balance sheet (as seen on the Bloomberg terminal). After Mario Draghi pledged to offer the Outright Monetary Transactions (OMT) to any European country that contracted with the ESM or EFSF for help, the sovereign debt markets in Europe have quieted and yield spreads returned to a sense of normalcy. Many people believed that the euro currency would suffer from Draghi’s promise of massive liquidity to meet funding needs. The EURO shorts were wrong and the proof lies in the three charts I am providing.
The budget negotiations and political maneuvering that have clogged the airwaves and the capital flows are now kicked further down the road and financial markets can again resume crunching data and analyzing fundamentals and technicals. It became a distraction as the television pundits and anchors opined on the impact of the “Washington Standoff.” The worst part of the entire drama was the constant parade of corporate CEOs warning Congress about the damage being done to the U.S. economy.
As the sun sets on the Greek drama, the most predicted outcome has indeed taken place as the IMF/EU and ECB/EFSF/ESM have come to an agreement about bringing the Greek debt load to a robust level of 124% debt-to-GDP ratio by 2020. There was no way the TROIKA was going to risk the entire EURO project on a mere 44 BILLION EURO payout to the Greek government. The game was played out to the 11th hour–oh those drama queens in Brussels–and although the OFFICIAL SECTOR did not take an official haircut, the core nations of the European financial system do stand to take a bath. IMF Director Lagarde was able to save face as the Greek debt levels will reach the previously promised levels of 120%. Madame Lagarde can now go to the IMF Board and report that all previously agreed to conditions have been ratified by the EU and await the signing of the memorandum of understanding with the Greek leadership. The IMF needed to get Greece out of the way so it can figure out the role it will play in the Spanish bailout and/or Italy.
First and foremost, a happy Thanksgiving to all the readers of NOTES FROM UNDERGROUND. The growth in readership and the high level of discourse is something I am very grateful and certainly thankful for in full measure. As much energy as I expend in formulating the blog, it is worth the effort because it helps anchor my thoughts about the impact of the global political economy. It is certainly the definition of a give-get. So again, thanks to all my readers.
In what was a very slow new weekend the most significant story is that Spanish PM Rajoy’s political party held on to power in the PM’s home state of Galicia. This was considered to be an important test for Rajoy for if his support in his traditional support base had turned against him, there would be no chance that the PM would have proceeded down the road of further austerity. Now Señor Rajoy may be emboldened to surrender to the demands of German-imposed CONDITIONALITY so as to receive the proposed bailout from the ESM. This should be short-term bullish for the EURO as it will remove one of the obstacles that was blocking a massive dose of liquidity into the Spanish financial system. The trade-off game of financial support for enacting more austerity should help the markets as near-term fears of a Spanish collapse should be postponed.
The IMF took center stage during the last four days as its meeting in Tokyo became the central focus of the global macro world. As usual, the IMF communique promised much via the usual platitudes but as investors and traders we are left in the lurch as much is promised but no real substance is revealed. Probably the most important element in the communique is the line, “WE NEED TO ACT DECISIVELY TO BREAK NEGATIVE FEEDBACK LOOPS AND RESTORE THE GLOBAL ECONOMY TO A PATH OF STRONG,SUSTAINABLE AND BALANCED GROWTH.” Why is this simple statement so critical? In last week’s IMF-produced “World Economic Outlook,” it revealed that the IMF‘s model is probably flawed when measuring the impact of fiscal policy on economic growth.
A an op-ed piece in last weeks WSJ created a great deal of buzz in the financial media. Appearing a few days after the aggressive move by the FED, the opinion piece written by five eminent economists–George Schultz, Michael Boskin, John Cogan, Allan Meltzer and John B. Taylor–criticizes the Bernanke Fed’s QE policy from many different aspects. It is not the criticism that is significant but rather the stature of the economists that are calling the question of the FED’s continued one-dimensional response to the tepid growth following the deep recession of 2007-2008. The media would have the public believe that the only economists qualified to theorize on the problems at hand are those chosen by the FED and its research staff. The financial media bowed to the altar of Alan Greenspan– the Maestro, Oracle and whatever else–and thus the cult of personality was thrust upon the markets.
The FED hounds were unmuzzled after last week’s FOMC and “The Line it Is Drawn. The Curse It is Cast.” Bob Dylan must have been anticipating the difference of opinion that is developing within the Federal Reserve bank. In a speech last night, Dallas Fed President Richard Fisher said: “There are many superb PHD theorists among the 19 members of the FOMC and support staff. There are only a handful of us–four, to be exact–who have worked as bankers or in the financial markets.” Fisher discussed holding back from further QE based on evidence from his business contacts. The Dallas Fed President was dismissed when,”Some suggested that perhaps my corporate contacts were not sophisticated in the workings of monetary policy.” (Hat tip to Professor K.W. for sending the piece). It seems that the collegial attitude is eroding at the FED if the ivory tower is not the place of residence. Today, it was the Minneapolis Fed President Kocherlakota who delivered what I consider to be an outlandish speech.