Posts Tagged ‘QE’

Notes From Underground: Putting Things In Perspective

December 5, 2017

Just a few quick points that are relevant to the markets at the end of the year:

1. Tonight I am including charts of the U.S/German two-year yield differentials. The U.S. two-year note is yielding 256 basis points above the German rate. This is relevant because both instruments are high quality assets that play an important role as collateral in the funding markets. I’ve also included a 25-year chart of the U.S. 2/10 yield curve. Note that the last two INVERSIONS occurred before significant equity market corrections. Does this current flattening portend a stock market correction? We can’t be certain because the role of the central banks has certainly created an investment environment where markets suffer from a lack of RISK PREMIA in all asset prices.

 

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Notes From Underground: Klaatu Barada Nikto (Stop The Printing Presses!)

November 19, 2017

In this famous science fiction phrase from the movie “The Day the Earth Stood Still,” I extract my own meaning: Stop the printing before the world’s financial system is destroyed. Sci-fi writer Edmund North never deciphered the English translation of this “alien” phrase but I believe my interpretation applies to these tumultuous times in central banking. The ROBOT GORT is prevented from destroying the world when the words are spoken to him. Thus I say to Mario Draghi: “Mario Barada Nikto.” The continued use of large-scale asset purchases to enhance global liquidity in a period of increased economic growth is preventing the markets from stabilizing. The proof is in the continued mispricing of corporate debt. Last week, the BBB-rated French firm Veolia sold 500 million euros of three-year notes for -0.026%. Yes, a mediocre credit was able to borrow at less than zero. This is the insanity of the financial world to which the central banks continue to provide liquidity.

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Notes From Underground: An Assessment of Market-Moving Events (Or, Which Narrative is Most Critical?)

November 5, 2017

Three central bank meetings, the selection of a new Fed chair, the release of a major new tax policy and the unemployment report provided the markets with great potential for increased volatility. Instead the markets yawned and carried equities to new all-time highs.The central bank decisions went as expected; the unemployment was a bit weaker than projected but the weather problems from the hurricanes have probably not been fully tallied.

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Notes From Underground: It’s Halloween and Nothing Scares the Markets

October 31, 2017

It has been a few days since the ECB announced its intentions. There was no surprise as President Draghi met market expectations by beginning a NON-TAPER, cutting QE by 30 billion euros beginning in January 2018. So as we considered the outcome of PACE and DURATION, the ECB cut the pace in half and extended the program by nine months to September 2018. The most significant piece of the Draghi press conference was his persistence on making the composition of future purchases. It seems that the ECB will utilize the European corporate bond market to meet its requirement and stay true to its CAPITAL KEY. By buying more corporate debt the ECB will find enough German assets to buy. The major problem for the European markets is that UNLIKE the U.S. financial system, European banks are a much more important actor as they provide far more corporate loans on a percentage basis of GDP than U.S. banks. The U.S. financial system relied to a far greater extent on issuing bonds. We have previously discussed the absurd chart showing European high yield debt to have a lower interest rate than 10-year U.S. Treasuries.

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Notes From Underground: Him Or Me, What’s It Gonna Be?

October 24, 2017

President Trump is the ultimate drama queen. The president is drawing out his FED selection as he titillates the markets with the drips and drabs as to who is the most probable choice. Here is my best guess: Because this president reminds the nation how great he is doing using the stock markets as the barometer it would follow that his choice would be the best one for keeping equity prices elevated. Kevin Warsh and John Taylor would be a problem as the equity markets would become cautious for fear of short-term interest rates rising at a quicker pace. It seems that Jerome Powell and Janet Yellen would be the ones to sustain the current stock rally as they are known entities to the Wall street contingent. Of course the ultimate booster of all asset classes would be Neel Kashkari, the latest dissenter to the previous rate increases in 2017.

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Notes From Underground: Prepping For Draghi

October 23, 2017

Another moment in time with Rick Santelli. We reviewed some of today’s early market reactions to the weekend events. A measure of the impact of President Mario Draghi’s ECB policy was reflected in the prices of European sovereign debt. The political news out of Spain and Italy let alone recent elections in Austria and the Czech Republic SHOULD have sent Italian and Spanish yields HIGHER but because of the ECB’s ongoing LARGE ASSET PURCHASES Spanish and Italian yields on 10-year debt actually dropped the most today.

(Click on the image to watch me and Rick discuss the weekend’s events.)

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Notes From Underground: A Take On Mario Draghi in Two Parts

September 10, 2017

Part I: Mario Draghi, the master of obfuscation was at his best Thursday as he dodged MULTIPLE questions about the recent STRENGTH in the euro. Journalists were very well prepared and even threw back Draghi’s previous responses about how a 10 percent currency appreciation would lower inflation measures by 0.5 percent. But Draghi met each question with a, “Yes, we discussed it as some members of the ECB Board were concerned about the EURO and its impact on exports and import prices.”

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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: 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: Jobs Report Gives the Fed the OK to QT

August 6, 2017

Friday’s unemployment report was on the strong side, although certainly not much stronger than market consensus. Yes, nonfarm payrolls were on the high-end but average hourly earnings were right on target, hours worked remained the same at 34.5 and the unemployment rate dropped to 4.3%, but that could be due to a slight rounding error. The markets traded as if the FED could possibly raise rates in September, but I believe the jobs report provides the impetus for the FED to commence with QT. The U.S. yield curves reacted in such a manner as the 2/10 curve actually rose 3.5 basis points, closing at 91.5.

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