Posts Tagged ‘FOMC’

Notes From Underground: Which Spark Will Start the Prairie Fire?

September 27, 2017

In several blog posts over the last eight years I have used the words of Mao to relate to the potential issues that could cause severe disruption to the global financial system. If you listen to the narrative propagated by the mainstream financial media your concerns would revolve around North Korea, the Trump tax and healthcare plans, the FED starting QT (or else citing the Fed’s ridiculous dot plots), concerns about the potential shutdown of the U.S. government, the economic implications of Brexit, etc. The bottom line is that all the forecasters have been wrong for long as Phillip Tetlock revealed in his wonderful book, Superforecasting. The FED has been worshiped as all-knowing fonts of wisdom when nothing they have forecast has proven correct. Yesterday, Fed Chair Janet Yellen admitted that the FED is as confused about the lack of inflation as most of the prognosticators on Wall Street. This confirmed my theory that what the FED peddles IS NOT ROCKET SCIENCE.

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Notes From Underground: The Sound Of Complacency Shattering

September 19, 2017

First, for all those in the Notes From Underground community who celebrate Rosh Hashanah, have a happy and healthy New Year. For those who don’t I also wish you a happy and healthy New Year. Thanks for your continued support and if I angered you with my thoughts I have to say it was not done to be hurtful but rather to provoke a high-quality discussion around issues in the realm of global-macro finance. When I listened to the Ray Dalio interview on CNBC today it was comforting to know that the mission of this BLOG is similar to what Dalio tries to accomplish with his employees. NOTES FROM UNDERGROUND is not about PERSONAL VALIDATION but about discourse in the crucible of financial ideas, striving to refine the GOLD from the DROSS. Let’s hope the SHOFAR BLAST shatters the complacency of our static thoughts in all matters of our lives.

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Notes From Underground: The FOMC, BOJ and German Elections Lead the Way to Quarter-End

September 18, 2017

As the earth rock keeps spinning we continue to monitor global events that could make investors/traders dizzy. This week the FOMC is EXPECTED to announce that it will begin its quantitative tightening (QT) by revealing the date of its plan to shrink its balance sheet by a net $10 BILLION of assets a month ($6 billion of Treasuries, $4 billion of MBS) and increasing the amounts quarterly so the program results in little market disruption. Remember, Chair Yellen has said she believes that it will be “like watching paint dry.” The world’s equity markets — especially the U.S. — are reflecting little concern about the Fed withdrawing “small” amounts of liquidity.

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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: Its Was a Great Week for S&Ps

August 20, 2017

The news was extremely positive for the equity markets last week. FOUR key points:

  1. Retail Sales proved to be much stronger than consensus;
  2. The FOMC minutes were very DOVISH as the FED was concerned about the inability of upward inflation to gain traction;
  3. The demise of anti-globalist Steve Bannon was greeted with cheers on the floor of the New York Stock Exchange. News of the removal resulted in a rally in the S&Ps on Friday, but it was short-lived; and
  4. The bobble heads of the access media reported the dismissal as an elevation of the Davos-inspired crowd, represented by the Gary Cohn wing of the Trump administration.

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Notes From Underground: Yield Curves Are Needles and Pins

August 7, 2017

I saw her today, I saw her face
It was the face I loved, and I knew
I had to run away
And get down on my knees and pray,that they go away
Still it begins
Needles and pins

These lyrics seem to describe the market’s relationship with Janet Yellen and her FOMC board. When I blog about yield curves it seems to elicit the greatest response as traders are trying to position themselves in a low-risk, high-reward trade. There was a question on last night’s POST from RLD concerning the 2/10 curve and the possibility of buying bank stocks, if my thesis about a steepening curve reaction to QT is correct. This is an interesting query and reflects on the intelligence of the readers of NOTES. The mainstream media reports on the relationship of yield curves and bank stocks in a regular fashion and theorizes that the correlation is high: Steeper curves beget higher bank revenues resulting in higher bank stocks.T he correlation is far from consistent as bank stocks were making highs in 2007 even as the curve dramatically flattened.

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Notes From Underground: I Knew I Would Return

August 2, 2017

Last week’s FOMC meeting proved BORING and left me speechless … but not thoughtless. The only phrase of significance was the use of “RELATIVELY SOON” in placing some forward guidance to the beginning of quantitative tightening (h/t Boockvar). We have no idea what “relatively soon” means but I continue to ask: WHY WAIT? Yes, it may be because the FED is nervous about the potential of DEBT CEILING caused by a Congress filled with know-nothings and do-nothings clogging the day-to-day financing of government operations.

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Notes From Underground: Brainard Delivers a Very Significant Speech

July 11, 2017

Tuesday, FOMC Governor Lael Brainard delivered what I deem to be a very important speech, which spoke to the necessity starting to shrink the balance sheet while halting further interest rate increases. The speech, titled, “Cross-Border Spillovers of Balance Sheet Normalization,” is packed with insight into FOMC thinking reminiscent of the powerful speeches of former Fed Vice Chairman Donald Kohn. I have noted that Brainard is Yellen’s confidant (mere conjecture on my part) similar to how Kohn served as Greenspan’s consigliere, providing great insight into FED policy. Governor Brainard puts forth the reasons for HOLDING fed funds steady while beginning the task of balance sheet shrinkage. Important points to consider:

1. Raising policy rates and reducing central bank balance sheets–appear to affect domestic output and inflation in a qualitatively similar way. This means that central banks can substitute between raising the policy rate and shrinking the balance sheet to remove accommodation;

2. Is there a difference between conventional policy hikes or shrinking the balance sheet on cross-border spillover effects? “Most prominently, the exchange rate may be more sensitive to the path of short-term rates than to balance sheet adjustments, as some research suggests,” (Stavrakeva and Tang, 2016). This issue is what I have discussed for eight years in NOTES FROM UNDERGROUND. Foreign exchange rates are more sensitive to the short-end of the curve than the long-end. A flattening curve has historically been positive for a currency as the interest rate market is signalling that the central bank is too tight for economic conditions. (Brainard cites the example of the FED‘s Operation Twist in the early 1960s.)

If a similar amount of tightening is achieved through the balance sheet reduction “… while keeping the POLICY RATE unchanged, the exchange rate would appreciate to a SMALLER degree, reflecting the lower assumed sensitivity of the exchange rate to the term premium than to policy rates.” Governor Brainard further supports this view by noting that other countries would not have to act as swiftly to raise rates in response and therefore allow other nations to pick up the slack if the U.S. economy was to slow down. Also, in the case of a managed exchange rate, she cites China in 2015-16 as China responded to the incipient rise in U.S. fed funds rate by squeezing liquidity and depreciating the YUAN.

3. If different monetary regimes are pursuing different policies in trying to contain demand shocks, the cross-border impact on the nation using interest rate policy versus balance sheet shrinkage in the other will probably result in greater foreign exchange rate movements. Brainard notes that the “… downward pressure on term premiums around the globe, especially in those foreign economies whose bonds were perceived as close substitutes.” Certainly this speaks to the BUND/U.S. 10-YEAR NOTE correlation. In this regard the Brainard suggests that the BOJ and ECB present programs provides an opportunity for the FED to reduce the balance sheet without as much disruption as the fungibility of global markets will provide some support to U.S. term premiums.

4. Inflation for Brainard will remain very important. She said, “I will want to monitor inflation developments carefully, and to move cautiously on further increases in the FEDERAL FUNDS RATE, so as to help guide inflation back up around symmetric target.”

I fully expect Chair Yellen to speak to this in her testimony this week. If I am right, the yield curve OUGHT to steepen further. The 2/10 curve closed at 98 basis points Tuesday after holding support levels. The SPOOS and NASDAQ should fine near-term strength as markets believe that FED FUNDS INCREASES ARE ON HOLD. Commodities should return to supply/demand fundamentals and the precious metals OUGHT to repel fears of rising short-term rates. Also, emerging markets should breathe a sigh of relief.

There is much to contemplate in Brainard’s speech, but if she plays Jiminy Cricket to Janet Yellen expect the Fed chair to support this outlook. The FED seems to have been shaken by the recent severe flattening in the yield curves. Other political factors such as the White House tweets and buffoonery cannot be accounted for in an algo-driven world. But I believe that Brainard did more to impact markets than the e-mails of Donald Trump, Jr.

Notes From Underground: Ben Bernanke Channels Karl Marx

June 26, 2017

Set your way back machines to and visit the philosophy of the Young Marx in his famous musings, The Economic and Philosophic Manuscripts of 1844. Read the concerns that Marx raises about the ALIENATION of LABOR. In the book edited by Dirk J.Struik, I am citing pieces from the chapter, “Wages of Labor.”

  1. “Wages are determined through the antagonistic struggle between capitalist and worker.”
  2. “The demand for men necessarily governs the production of men,as of every other commodity. Should supply greatly exceed demand, a section of the workers sinks into beggary or starvation.”
  3. “The worker need not necessarily gain when the capitalist does,but he necessarily loses when the latter loses.”

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Notes From Underground: Pour a Yamizaki, Enjoy 30 Minutes of Harris and Crudele

June 19, 2017

This morning I had the pleasure of sitting with a professional trader and discussing several themes that have coursed through NOTES FROM UNDERGROUND for the past several months, if not years. In staying with the Crudele hit I want to spend some time on offering some views on the significant flattening of the 5/30 curve during the last few weeks. More importantly, the 5/30 curve broke out to new multi-year lows, blowing through the previous low of 100.98. Today we closed at 99.5. The 2/10 curve was very stable and closed at 82.5 basis points holding above last weeks lows. Why is the more SPECULATIVE-oriented curve flattening more than the conventional investment directed curve?

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