Notes From Underground: So Many Piles of Dry Tinder

We at Notes From Underground haven’t been publishing as frequently but we have been working more intensively than ever. The global financial situation is fraught with many areas of potential hazards to shock the established complacencies of current equity market rallies.

We are proud to post three recent podcasts moderated by Richard Bonugli of the Financial Repression Authority. The episode on ENERGY is worth your attention as it features DOOMBERG, Dr. Anas Alhajii and Adam Rozencwajg. I must ask: What is Yra Harris doing with this esteemed group? The second podcast is with Peter Boockvar and adds the real-time technicals of Katie Stockton. The third and final podcast recorded Thursday has a full discussion on Europe with the highly regarded Daniel Lacalle.

Europe remains a keen area of interest as the ECB and EU try to operate in a difficult terrain caused by the EU’s failure to get an agreement of fiscal harmonization. The failure to unite and surrender sovereignty to a centralized taxing body remains a difficult problem for President Christine Lagarde as it means the ECB has to prepared for raising rates to curb inflation rather than speeding up its balance sheet unwind and risk fragmenting the European sovereign debt markets. These podcasts cover many of the most important issues in depth and any questions readers of NOTES may have can be posted in the comments section. The full community of NFU readers can engage in answering any query as long as it is not political.

One major point of interest: The next FED meeting is July25/26 and the market is presently predicting a high probability of another QUARTER-POINT rate increase. The recent inflation data was better than expected which led to an initial drop in the expectation of a rate rise but by Friday’s close the market had repriced a higher probability (more than 50%) of a hike at the upcoming meeting.

The greatest interest for the markets is the vote. Will it be unanimity that Powell strives for or will there be dissents? The JUNE meeting was unanimous but I believe Powell bought off the hawks with the “HAWKISH PAUSE.” Will he be able to subdue the DOVES with a “dovish hike” an indication the FED will be reticent going forward. It would be great for the markets if the vote were to be 8-4 on any rate hike so we can get some clarity on what FOMC voters are actually thinking.

There was an interesting piece last week from the CATO Institute by Jai Kedia titled, “The Fed Should Continue to Hold Steady.” The Cato Institute is one of the most influential voices of SOUND MONEY in the U.S. and when it raises the spectre of the FED holding STEADY it gives monetary doves an influential voice to bolster the decision to pause again. The basis for the CATO article was (of all things) THE TAYLOR RULE. The formula used by the Taylor Rule actually implies a FED FUNDS RATE of 4.866%, so according to this hard formula FED FUNDS could actually be lowered.

Will Phillip Jefferson, Lisa Cook, Austin Goolsbee and others raise the issue presented by Cato and vote no to a rate rise? Always 2+2=5 in NOTES FROM UNDERGROUND.

One major caveat: Why is the Swiss franc so strong against the dollar, as well as many other currencies? The current dollar/Swiss rate is challenging the January 12, 2015 weekly close of 0.8588, which was the week the SNB pulled the floor out from under the Eur/Chf cross, sending the Swiss franc soaring as the market had been heavily short FRANCS.

Yes, the dollar has been under pressure for a few weeks but why the Swiss with its interest rates of 1.75%? It may be that the SNB is SELLING some of its equity holdings (Apple and others) in an effort to take advantage of the recent global equity rally. When the SNB does QT they are selling assets that have generated huge profits, unlike the FED and the ECB, which own sovereign debt that is severely underwater.

We won’t know if this THEORY holds until we see the next release of the SNB’s balance sheet but something to watch. The Swiss may be the world’s greatest alchemists as they printed money and purchased real assets/corporations.


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