Posts Tagged ‘inflation’

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: 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: Draghi, the ECB and Germany

August 15, 2017

The upcoming meeting in Jackson Hole has become the focus of the global investment community. Why? After Draghi’s comments in Sintra, Portugal on June 27 sent global bond yields higher, the financial world will gauge whether  Draghi’s speech will signal the beginning of their own balance sheet shrinking. If Draghi were to announce the end of the quantitative easing, the impact would be for the EURO to rise for European BOND YIELDS to rise and, most importantly, the greatest increase in yields would be in the peripheral bonds (and maybe the most significant impact will be on global equity markets). BUT LET ME BE CLEAR, I THINK THIS IS A VERY LOW PROBABILITY EVENT and I will do a deep analysis as to why. Yet again:

1. In yesterday’s Financial Times, there was an article titled, “Draghi Faces Easing Dilemma A Strong Euro Sparks Concern.” The article notes that the STRONG EURO keeps inflation down and therefore prevents the ECB from fulfilling its 2% inflation mandate. Draghi is caught in a dilemma of his own making and there really is no way out as long as it speaks to the idea of a 2% inflation target that is self-imposed by the bank. Many months ago I conjectured that President Draghi would prefer a strong rally in the euro before the September German election. A strong euro silences the Bundesbank as it allows for Draghi to use a strong currency as a measure of the success for the ECB’s policy. If the EURO rallies further it will harm the French, Italian and Spanish economies, which are starting to experience growth, than it will impact the Germans. A one-price euro will not lead to Germany losing its edge within the EU for a single currency prevents that so the peripheral nations will have to engage in wage restraint to sustain its recent growth. The idea of wage suppression will hinder a rise in inflation providing the greatest problem for Draghi’s ECB;

2. In Tuesday’s FT, Thomas Hale and Kate Allen wrote a story titled, “Hopes For European ‘Safe’ Bonds Lean On Pre-Crisis Techniques.”  The reporters visit the issues of “aiming to make the continent’s financial system safer, the idea involves taking sovereign bonds from different European countries and packaging them together into safe bonds that would then carry various levels of risk.” This is what we called financially engineered sub-prime debt a decade ago. Take the German bunds, French oats and bundle with Greek, Italian, Portuguese and Spanish sovereign debt and you have a AAA instrument. The urge to create a EUROBOND is the essence of Draghi’s ECB and there are numerous ideas of how to achieve this end. As the article point out, “It is also a way of bringing European sovereign debt markets closer together without explicit ‘mutualisation,’ where debt is collectively issued by multiple countries, an idea that has proved politically toxic in Germany, in particular.”

The politics of the eurobond have become difficult because the Germans are VERY aware that it is the Bavarian Burghers who will be the creditors of the entire project. Every debt instrument must be guaranteed by credible collateral and several of the European peripheral nations lack the credibility of a solid creditor and making matters worse the weak creditors do not have a printing press. Why would Mario Draghi wish to undermine his efforts to backdoor his way to a EUROBOND by slowing the accumulation of debt assets. THE ECB IS NOT THE FED FOR DRAGHI HAS SET IT ON A PATH TO FULFILL THE MANDATE OF THE PRESERVATION OF THE EURO. Draghi needs to maintain the status quo until September 24 when he believes that Chancellor Merkel will prevail in the German election. Merkel has been a willing partner with President Draghi in his efforts to create a more perfect European union;

3. Also in Tuesday’s FT Claire Jones reported on the effort of challenges to the ECB’s QE program. Germany’s HIGH COURT issued an opinion that said some of the ECB’s actions may violate EU law.

In a case brought to Karlsruhe by “… right-wing members of Germany’s establishment” the German Constitutional Court issued a statement that there are “… significant reasons indicate that the ECB decisions governing the asset purchase programme violate the prohibition of monetary financing and exceed the monetary policy mandate of the ECB.” The court decided to refer the case to the European Court of Justice to get a sense of what the ECJ opinion is before hearing the case. The process could take a year before the German Court hears the case. The article cites a point made by German lawyer Hendrik Haag that “the wait for the ECJ decision may well be an elegant way out for the ECB. It may put pressure on the ECB to be a bit quicker with tapering the ECB programme.”

I TOTALLY DISAGREE WITH THIS LAWYERLY ASSESSMENT. In my view it gives the ECB further time to increase the balance sheet so furthering the effort for a EUROBOND. I will await Draghi’s speech from Jackson Hole but again, THE ECB HAS A MUCH DIFFERENT DESIRE THEN THE FED. Mario Draghi will play for time to hope for the best for his guardian angel, Chancellor Angela Merkel.

Heads up: I will be on CNBC with Rick Santelli tomorrow morning around 9:20am CDT.

Notes From Underground: Mario the Magnificent Keeps the Crowd Enthralled

July 23, 2017

Let me be perfectly clear: THE ECB’s THURSDAY PRESS CONFERENCE WAS DOVISH.

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Notes From Underground: Mario, Don’t Try to Lay No Boogie Woogie On the King of Rock ‘n’ Roll

April 27, 2017

Mario Draghi’s nonsense is a compost heap as he tries to continue his efforts to build the ECB‘s balance sheet to the point of no escape. The ECB president danced around inflation questions by generally holding to the view that inflation across the entire euro zone would have to rise to the 2% level for the central bank’s mandate to be met. Currently, Draghi holds to the view that the recent elevated levels of inflation are transitory due to higher energy costs. It was noted that there has been a decline in service sector costs, which could put downward pressure on inflation once the energy prices pass through the data. Draghi also emphasized that with the current unemployment levels in some EU countries there was far too much slack which keeps wages from rising. A positive point for the ECB is that it does not follow NAIRU as a major gatekeeper of wage levels. In his typical effort to elevate his position, Draghi applauded the ECB for saving the EU financial system and economy, but until the politicians make the needed structural changes there will be continued “substantial monetary accommodation” so the ECB can meet its inflation mandate.

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Notes From Underground: Will the Year of the Rooster Deliver a Wakeup Call?

December 18, 2016

In a September 11 post, I criticized the Japanese Central Banks’s policy for its technical approach to attempt to steepen its 2/10 yield. I wrote the following:

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Notes From Underground: The Magnificent Seven … the Governors Fall In Line

September 21, 2016

The vote was the key to the FOMC statement. Three regional presidents voted to raise rates for various reasons but at least the votes reflected their speeches. The Magnificent 7 voted to maintain rates at the current levels and wait for more time for labor market conditions to tighten as wage growth accelerates. (I TELL YOU JANET IT IS ALWAYS SOMETHING.) So the governors, plus new dove James Bullard, held firm against the outlying presidents. There’s no inner court role for Mester, George or Rosengren. My problem is that Stanley Fischer and William Dudley, both vocal proponents of raising rates, voted with Chair Yellen. Make no mistake about it, THIS IS JANET YELLEN’S FED.

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Notes From Underground: Cramer Unsavory? I Think Not

January 14, 2016

Jim Bullard? Now There Is An Unsavory Chap

Today was not like the other days for the break in the equity markets came early. As all the global markets were in sell mode St. Louis Fed President James Bullard hit the airwaves with thoughts about being wrong in his inflation projections. It appears that the selloff in crude oil is providing the Fed hawk with concerns that the SUMMARY of ECONOMIC PROJECTIONS may be softer than the December FOMC meeting revealed. Bullard sounded as if he would not be in favor of the Fed raising rates because of the inflation rate turning away from the spurious 2 percent mandate. The unsavoriness of Bullard’s comment is not that he fears a downturn in inflation, and maybe lower growth, but that Bullard seemed to find his DOVISH posture as the U.S. markets were heading toward the August lows. Bullard in unsavory because he called out CNBC’s Jim Cramer for “cheerleading for low rates twenty-four hours a day.”

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Notes From Underground: A Few Things Before the Financial Ship Sails

October 12, 2015

When holiday markets quash volume and new items repetitive, it provides an opportunity to catch up with some general concepts in a style I like to call “Quick Hitters.”

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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.

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