Posts Tagged ‘Janet Yellen’

Notes From Underground: Some Areas Of Concern and Importance

October 16, 2017

As the tinder of prairie fires builds, these areas of concern are important because of the potential impact they can have on the market:

1. Sunday’s election results in Austria give rise to concerns about the rise of euroskeptic groups in several European nations. Yes, the anti-immigration sentiment appears to be the dominant variable in bringing a right-wing government to Vienna, but the sparks from xenophobia can manifest into an anti-ECB issue as domestic citizens are asked to foot the bill for bail-outs of Italian banks. Many citizens of various European states have borne the costs of bailing out Italy, Spain, Ireland, Greece and Cyprus through negative interest rates, the ultimate tool of financial repression. German two-year notes are currently -73 basis points, even though German inflation is approaching 1.7%, resulting in a real yield of NEGATIVE 2.5% for the savers in German-based banks. Regardless of what the ECB does in terms of quantitative tightening President Draghi has maintained that negative rates will remain lower for longer. Financial repression will be the next theme for the European right.

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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: It’s All About the Narrative

August 27, 2017

The Kansas City Fed Symposium was steeped in boredom as all the hype failed to live up to the expectations of the media. The excitement centered around Mario Draghi potentially dropping hints about the beginning of quantitative tightening (QT). Rick Santelli spoke with former FOMC Governor Mark Olson, who rightfully predicted Chair Yellen would not reveal any sense of Fed intentions but he was dead wrong about Draghi. Olson opined that Yellen put the spotlight on President Draghi, but the ECB President must have suffered stage fright as he very bland when speaking to concerns about the Trump administration’s move to economic nationalism. There was not a single word about ECB policy.

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Notes From Underground: The ECB, FOMC Minutes and Dudley’s Speech

August 17, 2017

On Wednesday, I joined Rick Santelli for a chat, which was centered on the ECB and other central banks’ impact on global equity and debt markets. Just before the appearance, there appeared a Reuters story that said President Draghi would not speak about the ECB’s potential Quantitative Tightening, which my readers know supported what I have been steadfast in my conjecturing about possible ECB actions. IN A NOD TO A READER (hello, AGH), while it appears that all central banks pursue a common policy, THERE’S NO MONETARY EQUIVALENCE. Yes, they all purport to raise inflation the political variables each push for different outcomes.

(Click on the image to watch me and Rick discuss the central banks.)

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Notes From Underground: Shelter From the Storm

August 9, 2017

Not a word was spoke between us,there was little risk involved
Everything up to that point ,had been left unresolved
Try imagining a place where it’s always safe and warm
Come in, she said, I’ll give you shelter from the storm

When Bob Dylan released this song 42 years ago it was on the album Blood on the Tracks. When the FED embarked on its QE1, QE2 and QE3 it was to respond to the blood coursing through the streets of the U.S. financial system. The U.S. banking system was threatened with insolvency and the FED‘s monetary injections sheltered the banking system from a storm of forced systemic liquidation of assets. QE1 coupled with a questionable TARP program did prevent a systemic liquidation but QE2 and QE3 I always believed were superfluous but in the land of counterfactuals it is an impossible point to prove.

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Notes From Underground: Brainard’s Speech Was So Significant She Delivered It Again

July 13, 2017

Yes, Fed Governor Lael Brainard actually delivered Tuesday’s speech, “Cross-Border Spillovers of Balance Sheet Normalization,” AGAIN. This time it was to the National Bureau of Economic Research Summer Institute in New York City. Of course I jest as to why she redelivered it. Brainard was overshadowed by Chair Yellen’s testimony to the Senate Banking Committee, even though the Fed Chair deviated very little from Wednesday’s House testimony. The interesting thing was that Yellen backtracked on her hubristic statement she made last week about not experiencing another systemic financial crisis in her lifetime. A brazen statement like that is Greenspanish but certainly out of character for the demure Janet Yellen.

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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: She Does It Backwards and In Heels

June 14, 2017

Commentators on dance technique always maintain the Ginger Rogers was a better dancer than Fred Astaire for she performed everything he did but “backwards and in heels.” At today’s press conference the financial markets were left with the sense that Chair Yellen wants to rollback the massive balance sheet promulgated by Ben Bernanke. The most “hawkish” piece from the day was when Yellen said it’s not unhealthy to have a gap between the FED and MARKET EXPECTATIONS.

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