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  • Notes From Underground: BOE, check; ECB, check; Bank of Korea Raises
    By Yra

    As expected, the U.K. and the Trichet-led ECB held rate steady. The surprise was the South Korean Bank raising rates 25 basis points to 2.75 percent. Yet the markets, although purportedly surprised, did very little with the WON. More interesting for the currency markets was Trichet’s statement that the ECB was concerned about inflationary pressures within the EU. This on a day when Greek unemployment rose to more than 13 percent. Mr.Trichet, will you ever learn? The markets have just allowed the EU to phony up the Spanish and Portuguese DEBT auctions and before the DOLLAR can even try to rally, Trichet plays the INFLATION card. Really, with an overall European unemployment rate of 10 percent, do the ECB policy makers not believe in output gaps, and, of course, NAIRU?

    It is time for Dr. Bernanke and Dr. Yellen to make a house call on their European brethren. The motto of the ECB as coined by its first president, Wim Duisenberg, is “WE HEAR BUT WE DO NOT LISTEN.” The markets listened and wound up bidding the EURO currency up against the DOLLAR and all other currencies. The market was very short EUROs and caught off guard by Trichet’s stridency on inflation. At the same time, the FED was further put on the defensive by the JOBLESS CLAIMS DATA. The markets had been anticipating a number around 400,000 but the actual number increased from last week’s, rising to 445,000. This puts a pause to the FED‘s positive economic outlook for the JOBS picture is just not improving enough to back the doves at the FED off the QE agenda.


    While Trichet fights INFLATION, Bernanke is trying to prevent DEFLATION and strive to adhere to the FED’s DUAL MANDATE. Mervyn King and the Bank of England is caught between the ECB and the FED. Inflation numbers in the U.K. are rising but with the austerity promised by the Cameron government, the BOE is afraid of moving too quickly to head off inflation and therefore chose to keep in place the 200-billion-pound QE program. The POUND rallied even as the BOE stayed soft, and, as I thought yesterday, was more a reaction to the U.S. DOLLAR than anything else.
    Next week, Hu Jintao visits Washington and, amazingly, the Chinese currency has risen to the highest levels since January 1994. Geithner has been talking about the need for China to allow its currency to appreciate for its own benefit. He told the Chinese that a strong currency would help curtail domestic inflation pressures and work to prevent a damaging rise in asset prices. The rhetoric is very calm and thankfully lacks the stridency of some others in Congress. Geithner also explained to China that its currency policy was having a negative effect on other emerging markets. Finally, Brazil and the U.S. have found something to agree on. Now how about those ethanol subsidies and tariffs?
    Also, Mr. Geithner, as long as you are warning about the weak YUAN and its effect on Chinese asset prices, you may want to stop by the FED and have a conversation with Mr. Bernanke about THE PORTFOLIO BALANCE CHANNEL and the FED‘s view of the WEALTH EFFECT. Just looking for some consistency in a very unbalanced world.



    Tags: EU
    Jan 14 10:58 AM | Link | Comment!
  • Notes From Underground: The auctions had action … what am I? Bid?
      By Yra

    The Portuguese DEBT AUCTION today went as well as could be contrived. While the EURO initially stuttered, by days end it had rallied and ended the day up 1 percent. Tomorrow, the Spanish raise cash through a DEBT AUCTION and the market there has been well set up to take what the Spanish government offers. Interestingly, it was the GREEK DEBT markets that had the largest rally as the GREEK TWO-YEAR NOTE dropped to 10.09 percent from 11.44 percent. The BUNDS were sold off as the safe haven status of German debt eased.

    The U.S. Treasury sold $21 billion of 10-year notes as well and that auction also went well, causing a rally in the notes. So the credit markets were well-behaved today and EUROPE awaits Spain and a Bank Of England meeting on Thursday. Consensus is for the BOE to keep rates at .50 percent but the market will watch to see if there is any hint about ending the QE program in the U.K. Inflation has been creeping up more than the bank’s mandate, so it will be interesting if Mervyn King lets on that the Monetary Policy Committee is thinking of removing the extra stimulus.

    The strength of the BRITISH POUND today reflects that some investors are sensing a removal of QE policy so it will be useful to watch what the POUND does if there is no change. If the POUND were to rally further it may well reflect on the DOLLAR as the fundamentals of the U.K. economy is weak and the austerity plan has not even begun to bite. And, there is also a rise in the VAT tax that commenced on January 1, which is weighing on the economy and inflation.

    Two stories today provide food for thought and prompt me to think outside the proverbial box. In the U.S. equity markets, shares of ITT rallied more than 15 percent as the company announced that it was breaking itself into three publicly held firms, which allows for the unlocking of value for its more dynamic divisions. Large corporations are often trapped by their size as innovative products are not valued for growth as they are too insignificant within a behemoth. I have argued for years that GE would be better unlocking the energy and medical divisions and allowing the market to assess the value of ECOIMAGINATION on its own by spinning off the new technological advances. Let’s see if the GE board gets break-up fever as they watch the shares of ITT soar.

    A Bloomberg story reported that the European Central Bank’s GOLD holdings earned $130 billion in 2010, helping to support its overall balance sheet as the BOND part of its portfolio was under stress. It’s time for the ECB to issue GOLD-BACKED BONDS to support the PIIGS if the EURO structure is to survive. I would argue that ECB GOLD-BACKED BONDS would be the perfect securitized asset as it would attract investors seeking GOLD while paying the holders an interest rate. It would also make the European policy makers more responsible as they would certainly never default on the BONDS as they wouldn’t want the GOLD called away. It seems that GOLD-BACKED BONDS are the most prudent instrument for the times. Europe gets its funding needs at a much lower rate of interest while bringing into use the BARBAROUS RELIC. Gold investors would rejoice as it would remove the possible sale of the precious metal from the market, a true shining example of securitization.

    Tags: EU, GE
    Jan 13 9:51 AM | Link | Comment!
  • Notes From Underground: The Prophets at the FED relinquish record profits
     Notes From Underground: The Swiss are yodeling about the strength of the FRANC; Brazil wants the capital markets to get REAL
    Notes From Underground: The Prophets at the FED relinquish record profitsBy Yra

    The FEDERAL RESERVE gave its interest payments earned on the MBS and other securities to the U.S. Treasury as mandated and the media pundits were giddy. It’s very difficult to determine what this “profit” means. If the FED was forced to mark its massive purchases to market would there really be any gain? The FED would say that they can hold the securities to maturity but that would mean that they have no exit strategy from the Large Scale Asset Purchase policy–QE by any other name–and any talk of such exit plan would be mere rhetoric.

    Now that the Treasury has the money are they going to use it to offset the massive losses incurred and incurring on the portfolios of the nationalized FREDDIE MAC and FANNIE MAE? Maybe the profligate states like Illinois and California will demand that the FED provide the money to meet their severe budget shortfalls. To say the FED has earned money when so much is still at risk mirrors the P&Ls for which WALL STREET paid themselves in 2006 and 2007. Maybe Chuck Prince and Stan O’Neal should be appointed the Chairman and Vice-Chairman of the FED. The accounting ruse being played is equivalent to three card monte games in Central Park. I also wonder where the ducks go in the winter.

    Today, the Japanese announced that they would be purchasing European Bonds as they want to be good citizens of the global financial system. It seems that it was a vote of confidence in the EU but when their words are parsed it is a nice gesture but nothing to get too excited about. The BOJ will buy bonds from the EFSF, which are basically the high-quality bonds of the most credit-worthy Europeans with 60 basis points more yield. It could be a positive for the PIIGS if it means that other would-be buyers of EFSF issued bonds would be forced to purchase some periphery bonds as a way to enhance their overall yield. But the markets will have to wait for the upcoming auctions to confirm that reality.

    It does pose the question: IS EUROPE BECOMING A BETTER VALUE THAN THE U.S.? At least the PIIGS are paying rates commensurate to the risk, which is far more than the U.S. Government is doing. The FED‘s asset purchases have perverted the curve structure and it is impossible to determine what has value relative to risk. The market is going to be concerned with this issue until the time that the FED begins its exit strategy. Until then lets roll the dice.

    Tags: EU, FED
    Jan 12 11:00 PM | Link | Comment!
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