Posts Tagged ‘WSJ’

Notes From Underground: Investing in the Time of Hilsenrath

October 30, 2013

In the biggest news story of the day, Jon Hilsenrath reported that New Zealand bank Governor Wheeler led his board to hold the line on interest rates. (NOTE: Hilsenrath didn’t report the New Zealand news as he was too busy trying to impact U.S. markets with a tweet here and a tweet there.) The RBNZ did note that the global economic recovery remains “patchy.” The KIWI bank seems content to allow rates to remain on hold for two major reasons: 1. The macroprudential regulations instituted to slow house price inflation need more time to work–New Zealand instituted regulations on loan-to-value mortgages; and 2. “The exchange rate remains high and is a headwind to the traded goods sector. Sustained strength in the exchange rate that leads to lower inflationary pressure would provide the bank with greater flexibility as to the timing and magnitude of future increases in the OCR. Fiscal consolidation is also expected to continue weighing on demand over the next few years.”


Notes From Underground: Searching for Clarity in the Age of Monetary Policy On Steroids

May 12, 2013

The much-awaited piece from Jon Hilsenrath about FED “tapering” appeared in the weekend WSJ, and, as promised by the abundant tweets, it delivered very little in providing any new insights into Fed halting of security purchases. The headline, “Fed Maps Exit From Stimulus,” wasn’t a map of any kind and merely seemed to provide the philosopher’s answer to question of what to do when confronted with the fork in the road … TAKE IT. The FED is caught on the horns of a dilemma for it wants to provide some clarity as to how it will end the large-scale asset purchases (LSAP) without sending the market into a downside tailspin. The massive increase in the FED‘s balance sheet has provided the rocket fuel to boost the demand for all types of risky assets but how do they know the economy has enough strength to sustain the rally on its own. It seems that the most important voice now will be Fed Governor Jeremy Stein–more important than Jon Hilsenrath–for he seemed to unnerve Chairman Bernanke with his April 19 speech in which he warned about the distorting impact the Fed was having on risk assets. It seems the Chairman has awoken to the idea that the FED has blown an asset bubble, especially now that the Japanese have added to global liquidity.


Notes From Underground: Consensus gets it wrong again … another right for 2+2=5

November 2, 2010

The RBA raised interest rates last night to 4.75 percent  from 4.5 percent, throwing the predictions of economists into the trash bins of high probability outcomes. Over and over, the number crunchers miss the bigger picture that exists outside of their data machines. As we have said before, Australia is a good barometer of the global economy as it has most of the raw materials that the Asian emerging markets depend on to drive its engines of growth. As the RBA statement said:

“The global economy grew faster than trend over the year- to mid-2010. The exchange rate has risen significantly this year, reflecting the high level of commodity prices and the respective outlooks for monetary policy in Australia and the major countries. This will assist, at the margin, in containing pressure on inflation.”

Again, it is important to pay attention to the major supplier of raw materials to the global growth story. The bottom line is that the FED‘s policy is having its greatest impact outside the borders of the U.S. and as Donald Kohn openly opined in yesterday’s WSJ, the QE‘s impact on commodity prices is another story. The impact of Bernanke’s adherence to continual monetary creation is driving interest policy in other countries and the DOLLAR is the barometer as global growth potential is much greater outside Europe and America.

Now that we see that economic consensus is very often wrong, we say to BEN BERNANKE: IT IS TOO EARLY FOR MORE QE FOR YOU ARE GROPING IN THE DARK AND THE IMPACT OF ANOTHER ROUND OF QE IS IMPOSSIBLE TO MEASURE. Even the best FED analysts admit that its impact is unknown. There are things going on in the global economy that suggest it is time to let the policies that have been set in motion be allowed to work without upsetting the fragile political balance that exists in the world. The European debt problems will be made much worse as the EURO rallies and the PIIGS will have to swallow more austerity as European growth is affected by a strong currency.

Furthermore–and I cannot stress this point enough–another round of QE in the $500 billion to $1 trillion level will allow the Chinese to escape from the dollar trap in which they are caught. The Chinese have had to keep DOLLAR holdings as a massive move to sell would drive the value of those holdings much lower and then enslaves them to the U.S. By going on a large QE program, the FED would provide the Chinese with the large buyer that the People’s Bank of China would need. To top it off, the FED would be providing prices that would result in a large gain on the huge amount of paper the Chinese own as the Treasury and MBS paper is held up artificially by FED intervention. The Chinese, therefore, pay no price for the strain on the global economy that their mercantilist policies have exacted.


Get your techicals in order and be prepared for the potential that CONSENSUS is WRONG.

Notes From Underground: This week’s main events-elections, FOMC, unemployment

November 1, 2010

The slew of U.S. data has been a mixed result. The personal spending and earnings number were both soft, while the PMI manufacturing number was better than anticipated. Equity markets shrugged off the weaker data as the market closed higher, although far off the early highs in the S&Ps and even traded lower late in the day.


Notes From Underground: China begins a game of Chicken to see if Schumer is a rebel without a cause

September 26, 2010

During the weekend BOJ Governor Shirakawa delivered a speech in which he stated that the BOJ is “ready to take appropriate action if needed” to deal with the strength of the YEN. It seems that the Japanese government has been getting more heat from the corporate sector because of the YEN’s relative strength and the damage it is doing to the major exporters. Shirakawa offered caution on how the “appropriate actions would proceed as the BOJ is prohibited from “monetizing debt”  and it also does not want to risk raising bond yields from fear of inflation.

BOJ seems to have a self-imposed cap on government bond buying so as to avoid debt monetization. Shirakawa alluded to the concept that the BOJ could not buy an amount bigger than the cash in circulation. He didn’t say that it was illegal restraint or just a precautionary stance. The BOJ is on the HORNS OF A DILEMMA as it risks creating inflation that would badly undermine the vast majority of domestic Japanese investors. It is important to remember that 97 percent of all outstanding JGBs are owned by the Japanese themselves–unlike the holdings of U.S. treasuries and MBSs. No wonder the Chinese are buying Japanese debt. It would be political suicide for the MOF to push too aggressively on the monetary creation issue for the huge impact it would have on retiring Japanese savers. Shirakawa and the bank, though, appear nervous that politicans such as the defeated OZAWA will make some move to amend the Bank of Japan law, which guarantees its independence. This is a very serious dilemma for the Japanese polity and we will watch closely. Ever since the initial intervention of September 15,the DOLLAR/YEN has settled down but the EURO/YEN has rallied from 108 to close out last week at almost 114. This is the best effect the Japanese could have gotten.

After all the glad handing between Wen Jiabao and Obama, China this week announced that it was levying anti-dumping duties on the import of U.S. chicken products. It has accused the U.S. poultry  industry of dumping chicken broiler parts, which has caused damage to its domestic industry. China says it will palce import surcharges of 50 to 105 percent. In the mainstay of world trade, this is no big deal–ok chicken shit–but it sends a message. Schumer and others want to place a tariff on the Chinese for currency manipulation, but the Chinese know that rural, agrarian states in the U.S. Senate and these states have a great deal to lose in a trade war with the U.S. American farmers are doing phenomenally as they export massive amounts of product to the Chinese. Many traders have been blindsided this summer by the continuing strength in ag markets, even as the U.S. farmers bring in record crops. Latin America also had large crops last year so even with drought in Russia and Ukraine, crop prices were and have held up very well. Even Caterpillar and John Deere have been in opposition to the Schumer initiatives. The Chinese have put the senate on notice that the tariff game is much more complicated than the simplistic language of populism.

The most interesting article over the weekend was the front page WSJ piece about the super-secret committee of European heavyweights that met to make sure the entire EU project didn’t implode. The acrimony between Sarkozy and Merkel was very real and we would suggest that the wounds will take long to heal. Sarkozy was doing everything he could to gain the upper hand on the bailout of the PIIGS and it was reported he tried to bring a television crew to one of the meetings as to embarrass Merkel.

As the story unfolded, it was a real possibility that the EU could have blown apart. As we blogged about a month ago, the idea of Sarkozy heading the G-20 beginning in November 2010 needs constant surveillance as a politically wounded Sarkozy is capable of great mischievous. The stresses in the foundation of Europe are far from over as the WSJ poignantly exposes. Yes, the EURO has rallied more than 10 percent since the height of this summer’s tensions. It probably is the surest sign of how weak the underlying fundamentals are for the U.S. DOLLAR. The more that is revealed about the fragility of the economies of the developed world, the more we realize how difficult the trading environment is and will continue to be. Keep your technicals up and be ready for violent swings as the global political economy reacts to sudden changes wrought by weak economic fundamentals. Throw in the impending trade friction and the surprises can come from all corners of the world. This is not the environment to be playing CHICKEN.