Posts Tagged ‘Jeremy Stein’

Notes From Underground: Sunday’s World Cup Final = Creditor/Debtor Bowl?

July 10, 2014

There’s a little levity during a very stressful week of trading. Germany meeting Argentina in the World Cup final is symbolic of the battles being waged by the world’s central bankers. Jeremy Stein and the BIS view the threat of financial stability a potential concern of Janet Yellen and Mario Draghi. The world’s financial markets will be watching to see what style of play on the pitch prevails: The aggressive Argentinian speed or the more AUSTERE and supreme defensive style of Germany. In the spirit of global macro humor I ask these questions:

  1. Will presiding referee Thomas Griesa issue a RED CARD to the entire Argentinian team for defaulting on its debt?
  2. If the Argentinians get control of the ball will someone from Elliott Associates come and grab it as Griesa deems it an asset of the debtors?
  3. If  Argentina prevails, will the trophy be confiscated and given to the intransigent creditors for sale on E-Bay?
  4. Will Griesa suffer the slings and arrows of outrageous fortune as he is deemed by FIFA to be a biased American judiciary with no genuine knowledge of the international beautiful game of debtor/creditor?

***The question to which we keep returning: ARE THE WORLD’S CENTRAL BANKS THREATENING THEIR CREDIBILITY? A corollary  question: DOES THE FED UNDERSTAND ITS OWN FALLIBILITY? As yesterday’s FOMC minutes revealed, confusion reigns within the FED as to the strength of the real economy, especially in ways to measure the OUTPUT GAP of the employment data. How much slack exists in the labor pool to prevent a dramatic rise in wages is of paramount importance for the Fed’s “forward guidance” (and signaling to markets future FED intentions). The FED speaks with great confidence in its projections but if past performance is a guide investors should treat all Fed projections with skepticism. It was the highly regarded Ben Bernanke who maintained well into late 2007 that the housing slowdown was well contained and should pose no problems for the U.S.economy. Yet, the impact of the U.S. credit crisis was severe enough to effect banks and bondholders across the globe. The bottom line is that the FED is fraught with failings and for investors to treat all Fed releases as pearls of perfection should proceed with caution.

In an Financial Times piece published yesterday, Axel Merk wrote the following:
“Ms. Yellen told us that policy under her leadership is not rules based. As such, market participants have to rely on the Fed’s ad hoc assessment. And that is very much like reading tea leaves, as the Fed is looking at backward-looking indicators such as the most recent unemployment report. Forward-looking indicators, such as the yield curve, are less reliable as the Fed itself has actively managed gauges. That, in turn, forces market participants to try to read Ms. Yellen’s mind. Her statements make it clear that her focus is on keeping rates low to help promote job growth until inflation readings get enough over the targeted 2 percent level to warrant concern in her mind.”
So, again, the price of the FED‘s certainty can be found in a weak DOLLAR and ultimately strong precious metals. If Yellen and Bernanke admit to not understanding GOLD, I advise measuring your own fallibility and putting that into your projections.
***And now back to Europe. Readers of Notes From Underground have known that the European financial markets have never fallen off the radar as the rally in peripheral debt and certain European banks were deemed to be a fool’s paradise. Today’s news about Portuguese bank, Banco Espirito Santo, missed a bond payment sent chills through the market. Banks have never healed but have been recipients of the ECB‘s liquidity efforts. However, non-performing loans have continued to plague the balance sheets of many Spanish, Italian, and Portuguese financial institutions. (Yep, the PIIGS have returned to the headlines.) More importantly, if the ECB and the BIS continue to disagree about interest rates and financial stability, the BIS can inflict pain on Europe’s banks by pushing for sovereign debt to some type of risk-weighting, requiring the need for more bank capital. Banco Espirito Santo have only survived through the European debt crisis by loading up on Portuguese sovereign bonds. (That is, borrowing from the ECB at very low rates, buying Portuguese debt and earning the differential, all risk free.) If the BIS keeps pushing back against the ECB and the FED, more bank problems will arise.
***However, in the eyes of the French and Mario Draghi there was a positive result from the Banco Espirito Santo: the weakening of the EURO against most currencies. The move was not dramatic but did provide some respite from recent euro strength. THE KEY TO THE EURO MAY BE IN THE EURO/SWEDE CURRENCY CROSS. On July 3 the Riksbank slashed interest rates in an effort to keep the KRONER weak against the EURO (in my opinion). IF THE EUR/STOKIE TAKES OUT THE LOW OF THE CROSS FROM JULY 3 IT WILL BE A CRITICAL STATEMENT ABOUT INCREASING PROBLEMS IN THE EUROPEAN FINANCIAL SYSTEM. The range for the EUR/STOK on the day in question was: a high of 9.3580; a low of 9.1540 with a close of 9.2856. Today the close was 9.2340, which is lower, but the July 3 low of 9.1540 should become the critical number.

Notes From Underground: Making Sense From the U.S. Dollar Post-Payrolls

May 4, 2014

The U.S. unemployment data released on Friday was extremely positive on two measures: Nonfarm payrolls increased by 288,000 and the unemployment rate dropped from 6.7 to 6.3 percent. The soft side of the numbers was that the average hours worked remained flat and the all-important average hourly earnings also stayed flat, undermining the robustness of the headline figure. The U.S. dollar and U.S. bond markets initially performed as expected as the DOLLAR strengthened and bond yields rose in response to positive news. However, by day’s end the DOLLAR was LOWER and the yields on the long end of the CURVE had also dropped while the SPOOS and DOW failed to hold gains on what was a very strong employment picture. The reason given by analysts was that the Ukraine situation was becoming more volatile and caused investors to be cautious over the weekend.


Notes From Underground: Why All the Noise From Friday’s Unemployment Data?

April 6, 2014

Friday’s jobs data was almost as the pundits had predicted. Why was there so much activity when the nonfarm payrolls and average hourly earnings and length of work week were basically the right on the consensus predictions? Yes, I’m aware that the “whisper number” was 250,000-plus due to the removal of harsh weather conditions. However, if that was the case, the dollar should have weakened and the short-end of the U.S. yield curve OUGHT to have outperformed the long end resulting in a STEEPENING of the 2/10 (none of which occurred). The 2/10 curve actually flattened as the U.S. stock markets began selling off, a drop initiated by the Nasdaq 100’s key momentum stocks. The weekly charts of the S&P and the Nasdaq took different turns as the SPOOs closed higher on the week and the Nasdaq closed lower, an indication of some reallocation from the momentum-oriented stocks to the more solid large-cap, earnings-based equities.


Notes From Underground: Mario “Act Swiftly If Need Be” Draghi

April 3, 2014

Our man in Frankfurt did not disappoint today. He was at his best as he kept the “unconventional tool” of negative interest rates in his bag of tricks. Again, the ECB President did not need to expand one euro to achieve a positive outcome. The euro rallied for a brief minute as the report came that the ECB announced “NO CHANGE” in policy. However, as traders we noticed that it was the smallest rally as market expectations were wrong. The EURO  remained offered all day once the press conference began and Mr. Draghi announced that the meeting was unanimous in its approach to the use of unconventional tools to combat the UNDER UTILIZED CAPACITY IN THE LABOR FORCE AND THE THREAT OF DEFLATION. The ECB went through his usual litany of reasons as to why the European economies remained with an output gap and subdued inflation: lower energy and food prices, plus the fact that the coming asset quality review was keeping banks from lending. The ECB is aware that bank lending is much more important to the European economy than in the U.S. as the American corporate bond market plays a much greater role in finance.


Notes From Underground: Assessing Fair Market Price (CNBC)

March 26, 2014

Santelli Exchange 3-25-2014

Click on the image to watch Rick and I discuss Jeremy Stein’s March 21 speech and the 5/30 curve.

Notes From Underground: What Is All The Yellen About?!?!?

March 24, 2014

The financial markets have been pondering the effects of Chair Yellen’s March 19 press conference and trying to discern what the true meaning of the “six month” import of rate rises beginning at the end of the tapering process that the Fed has initiated. The move in the short-end of the yield curve has revealed what I have long thought: The middle part of the yield curve has been badly mispriced as many hedge funds and fixed income buyers have comfortably bought more term instruments in the shadow of the Fed’s massive buying program. Venturing into the valley of the three- to five-year duration has not been the “safe harbor” that many thought and the result has been a post Fed meeting massive move in the 5/30 part of the yield curve.


Notes From Underground: Taper Impact on Emerging Markets (Santelli Exchange)

January 30, 2014



Click on the image to watch Rick Santelli and I discuss the selloff in emerging markets, as well as the U.S. government’s myRA plan.

Notes From Underground: Does The Unemployment Data Allow The Fed to Taper?? (Yra Says 90% Possibility in December)

December 8, 2013

Friday’s U.S. jobs report was stronger than pre-ADP consensus, only because of several pundits pushing the idea of 250,000 non farm payrolls (the whisper number seemed to be around 225,000). Thus, the 203,000 NFP was well within the range of prediction. The falling rate to 7.0% was a stronger sign of growth, especially when coupled with a rise in the participation rate and a fall in the U-6 rate. Average hours worked gained and wages increased by 0.2% per hour. All in all, it was the most positive data in many months. Manufacturing was a pleasant surprise as 27,000 jobs were added along with 17,000 jobs in the construction sector.


Notes From Underground: Sometimes Nothing Is A Pretty Good Hand (Cool Hand Luke)

August 6, 2013

I have been laying low as the news is just a constant regurgitation of old themes and the media trying to create buzz in a listless global market. The China slowdown is a story for the autumn. The FED Chairmanship is an issue that will be important for the winter. And the FED‘s possible story may be of significance in the spring. But for now it is the summer and the markets are tired and waiting for real political economic winds to blow. Even the upcoming German elections have failed to excite the markets. An Aussie rate cut last night barely moved the markets as the selloff lasted less than a HFT nanosecond and the Aussie dollar spent the rest of the day rallying. A very strong U.S. TRADE REPORT failed to elicit any DOLLAR RALLY. That, plus a nod to tapering from über-dovish Chicago Fed President Charles Evans, also failed to bring  a bid to the U.S. dollar.


Notes From Underground: Is It Possible To Win BEN STEIN’S Money? (BEN Bernanke + Jeremy STEIN)

July 7, 2013

The unemployment data from the U.S. and Canada were very much on target. After last month’s robust employment data, there was a small decrease in Canadian jobs and nothing outstanding in terms of manufacturing hiring so nothing to see north of the border. The U.S. nonfarm payrolls were slightly higher than expected but the average hourly earnings, which were more powerful, rose 0.4% (or 10 cents an hour). Increased wages are needed to sustain consumer demand so this was a positive factor in the data. Also, the April and May NFPs were both revised higher, making the markets believe that a September tapering of asset purchases is on the schedule. The U.S. BOND MARKETS were sold aggressively, sending yields on the long-end of the curve soaring.