First, I will say it again. QE3 is over and the Fed will maintain its “forward guidance” and be data dependent. The next bout of important data will be the U.S. unemployment release on November 7, which buys the Fed one more month of doing nothing. James Bullard painted the FED into a tight corner when he PANICKED and said the FED may want to refrain from removing QE3 while the SPOOs and other equity markets were at a 10 percent correction low. Bullard revealed that the Fed’s REACTION FUNCTION is the equity markets and of course Chairman Yellen’s concern about the lag in wages. The two key variables for the Fed have both been steady since the last meeting. The spoos are lower by 0.75 percent while the September unemployment report showed wage gains had no increase.
Posts Tagged ‘Ireland’
For the almost three years that NOTES has been published, I tried to make it clear why the subtext of NFU was that 2+2=5. The idea of the math being so obviously incorrect was a direct reference from Dostoyevsky’s short story Notes From Underground in which the great Slav nationalist rails against the rationalists of the day. My use of the 2+2=5 reference is an attack on the rationalists of today, otherwise known as those dependent on sophisticated models to offer explanations for all the answers to questions in the realm of social science–economics of course being the main target. I bring this up as a reflection on the most recent stress tests of the Spanish Banks for if those literalists who think that the math in the Dostoyevsky story is wrong, then the math in the Spanish stress tests should cause one’s eyes to glaze over.
As I covered in NOTES yesterday, the three-ring circus was coming to town Thursday and the show was so fantastic that it dazzled investors worldwide. The RIKSBANK began the show by cutting its rate by 25 basis points to get the audience in a festive mood. Mervyn the Magnificent from the Bank of England did his laying down and going limp act so as not to be sawed in half by the by those magicians of the slight of hand. The BOE left everything as is and presented a very benign statement that offered up very little as to its rationale for maintaining the present rates as well as the same ASSET BUYING PROGRAM. The market was gawking at the rising financials in Europe when in the center ring, Marvelous Mario dropped his cape and headed out on the high wire in which the safety net was pretended to be removed or was totally transparent.
As regular readers of NOTES are well aware, I have been very critical of market participants like George Soros and their sanguine views of the European DEBT CRISIS. Many analysts like Jim Cramer have spent the last years waving the debt problem away. First, it was Greece was too small to have an impact on Europe. Ireland was too small and besides was ring-fenced by a bad bank structure. Portugal was smaller than Greece, thus nothing to be concerned about. Italy and Spain were possible problems but many were listening to the flirtations of the Chinese, who, time after time, made solicitations about purchasing European Debt. (By the way, we still haven’t seen the Chinese Sovereign Wealth Fund enter the fray.) If all else failed, European financial leaders were too exposed to the EURO to allow the European Monetary Structure to collapse. Germany would not allow the work of Helmut Kohl and others to be just another failed attempt at a unified Europe.
The unemployment numbers were much as expected and the most solid news was that the employment participation rate increased to 63.9% to 63.7%, which didn’t cause the overall jobless rate to increase. It has been discussed in this BLOG that the best news for the financial markets would be for job growth to pick up, with an uptick in the UNEMPLOYMENT RATE AS WORKERS RETURN TO THE JOBS POOL AS A SIGN OF IMPROVED CONFIDENCE. This number provided some of that but still not enough returnees to bump the rate higher for the higher rate will make the FED‘s FOMC January 25 statement that much more relevant.
The European debt markets were thrown into further chaos today as the German/Italian 10-year notes spread blew up. In cash terms, the move was a widening of 58 basis points while in futures prices the differential was 512 ticks. Notes From Underground has been monitoring the BUND/BTP futures spread for almost two years. The BUND and BTP 10-year futures are the proxies for Europe as they are the only liquid contracts available to hedge risk. Prior to September 2009, the BUND was the only bond future contract available to manage risk and speculate on the European debt markets. The ITALIANS moves to list the BTP FUTURES so the banks and pensions would have a viable tool in which to hedge the massive amount of Italian debt that was in the market. It seemed that the Italian finance ministry had a noble intention, but as the debacle of the PIIGS has moved to center stage, the Italian BTP has been the only viable tool for speculators and hedgers to participate in the long end of the EURO debt markets.
The markets were all waiting for a major statement regarding the European political situation and its effect on the financial system. It wound up being the most banal as it makes me wonder what leaders of the two dominant nations in the EU held back from the media and markets. The main point was the announcement about a financial transaction tax, but to say there were no specifics about the tax given would be hyperbole. The markets were expecting some statement about an increase of funds for the EFSF, but again, nothing. The EURO was initially sold but by day’s end the damage to the currency was less than minimal.
Notes From Underground: The Europeans delivered on a bailout of the Peripherals (Maybe So, Maybe Not)July 21, 2011
After reading through the vast amount of news on the Brussels “emergency” meeting, I am not sure I truly understand what the final outcome of the European resolutions for financial stability entail. There are bond swaps on Greek debt, which will mean a soft default, and then there is an increase in the size of the EFSF funding and a move to allow the buying of secondary sovereign bonds. Again, it is not so easily to understand at this juncture as so much contradictory information is being provided that the final agreement doesn’t appear at this time.
It is very difficult to find the GOOD in the global financial world, while the BAD and UGLY abound. The GOOD could be “found ” in low interest rates on BONDS and NOTES in the U.S. Yet when you scratch below the surface, the fundamental reason for a 3% 10-YEAR NOTE is nothing to crow about. Poor employment data and the fear of a credit crisis in EUROPE is forcing investors to find shelter in the debt instruments of the U.S., even as the Washington budget circus captures the headlines. The subtext of the GOOD is that the EUROPEAN DEBT DRAMA almost cratered the global equity markets but support was found for the EQUITIES and ITALIAN BONDS when the ECB purportedly intervened in the DEBT markets by buying Italian and Spanish debt.
The Case-Shiller index today reported a further erosion in home values, which put more pressure on the U.S. economy. In addition to a drop in the major asset of most U.S. households, the CHICAGO PMI came in much weaker than expected as consumer confidence showed renewed weakness. Even with record low interest rates, the U.S. housing market cannot find any support for prices. As I have argued for years, if employment stays weak then housing will struggle … and so it goes.