Midwest Musings @midwest-musings - Tumblr Blog

WHAT TO SAY

I donno. Stocks are up, bonds are down, the dollar is up, and it looks as those things are going to stay that way. The remarkable sector is of course financials which six months ago were cold as ice, and now? The 10 year closed at 2.60% today which means at some point there has to be a rotation in to capture this yield but everything is so bullish that I wonder when. That might come if the Democrats can convince enough electors to elect Hilliary but unless that happens, The Donald seems to be the dominating force in all phases of this market. As far as the markets are concerned the guy hasn't put a foot wrong...of course he has yet to do anything of consequence but visions of sugar plums are dancing in people's heads all over the Street.

The foul winds are all international. While economic sentiment has grown increasingly positive in regard to the EU, the political issue grow more negative by the day. The Italian banking system will face a terminal point by the first week in January and the afor-mentioned political/financial crisis in Greece will begin to take center stage by mid-January. All these have the potential to become flash points for market disruption. And then there is China.

Trading in the Chinese sovereign debt market was suspended today in Shanghai in the face of plummeting prices no doubt reflecting the actions in the U.S. and the strength of the dollar. The market is almost entirely internal but obvious has consequences for the Yuan as well as risk indicators throughout China and the region. What is going on? No idea, but aside from my ignorance the scarier thing is I don't think anyone has any real idea either. Now I do know that the Chinese have been talking to anyone they think might have a handle on the near term consequences of a Trump administration or for that matter the actions of a Trump administration. Nor do I think they have gotten an outline with which they are satisfied. Things move quickly in China. The herd instinct is alive and well. It is to be watched closely.

That's it for this year except for a few interludes on issues that might arise. Check in from time to time for insightful insights. God! That's too much even for me!

Later, gang.

JANET TIME.....YAWN

Fed moved 25 b.p. today as everyone knew they would. Ms. Yellen's statement sounded like nothing had happened since the last meeting...nothing, zero, nada on the election or it's possible aftermath. She was a bit bullish in he predictions which called for a probable thrice-hike of 1/4% in 2017 and an eventual top rate of 3.00% by end-2018. Down went the DOW 114 points; up went the dollar index; the 2, 5 and 10 year shot up with the latter easily passing 2.53% but the Long Bond sat still. Damnedest thing...the curve actually flattened on the long end. What does all this mean? Beats me. Markets are bullish; rates have been moving up; employment is at full capacity according to the manner by which it is counted which is of course rubbish and sentiment is sky high. Janet, who loves data followed the data. Can we all move on now?

Oh, if you are looking for truly nuts, the Greeks are back in the news. Not to be content with BREXIT, the mess in Italy, the upcoming French and Dutch elections, the Euros have decided to grant the Greeks no further debt relief because it appears the Germans threw a hissy fit over PM Tsaspris' decision to grant Christmas bonuses which was verboten under the standing agreement. OK, say the Greeks, we're going to call for snap elections early next year so you guys have THAT, too, to deal with and of course a conservative government will win on a campaign of dump the Euro and if it comes to it, the Union as well. Guys, can't we all just get along? The Greeks can NEVER pay what they owe so why care.

And of course the Italians are forming a new interim government, the 1,236,202 in the last hundred years and people are actually bidding up the shares of Italian banks like this is a good thing. UniBank is talking up their capital raising exercise and Monte di Paschi is as well. Speaking of wells, there has to be something in the water in Italy...the old Roman viaducts broke down or something. They gotta test that stuff.

And the other Wells...Fargo that is. Their living will was rejected. Poor Big Danny Tarullo: the only saving and loan on his watch list (he likes that kind of business model) has let him down. Talk about the Grinch who stole Christmas. Danny is left pontificating while staring out into space wondering how did it all go so terribly wrong so fast. Worst yet, in 45 days of so he's going to have to deal with that bunch of thugs from Goldman Sachs over at Treasury so here is my first prediction for the new year: Mr. Tarullo will be the next governor to resign from the Federal Reserve...IT'S BEGINNING TO LOOK A LOT LIKE CHRISTMAS........!

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Tomorrow will be the last regular entry for a while except for the occasional effort. We head East to baby sit and then for Christmas and when we return we'll be all-consumed selling our house and moving to another smaller location in the neighborhood. Very bittersweet. This place has been great to us and in the almost 16 years we have owned it not very many bad things have happened. But it's time. I hope to be up and running by mid-January. A most Merry and Blessed Christmas to all, you my readers and a Brilliant New Year.

ALFRED E. NEWMAN TIME

Remember the great character of Mad Magazine? His mantra was, "What, Me Worry?" Old Al seems to be running things these days; nothing can stop the euphoria that has enveloped everything. The ten year closed at it's highest yield (2.47%) in ten years as the optimism relating to the U.S. economy increased. The DOW was up 40; the dollar reigning supreme against everything but oil related currencies (who cares) as people become more convinced that the production agreement will hold (it will not). And as for the attitude towards our friends in Italy...

Wow! Unibanc is well on it's way to raising some 14 billion Euros of new capital. Of course they have had to sell a couple of their crown jewels to do so but Hey, who's counting. And Monte de Paschi...this weekend it announced that it will go forward in it's attempt to raise 5 billion in new capital through a variety of mechanisms to include a debt for equity swap with junior bond holders. To repeat: it has no chance, no chance at all of it happening UNLESS the fix is in and there is an alternative credit risk standing in the wings about which we know nothing. Perhaps there is because everyone with whom I spoke this morning in Europe believes that there is a deal in the works. Perhaps so but if there is not and the Italian government has to engage in a straight bail-out as discussed on Friday and in the process wipe out a substantial number of small investors (voters), Mr. Newman's view will change very quickly and with it I suspect the view of the markets as a whole. Not to belabor the fact but that scenario spells big trouble on a global basis as certainly the Euro and the Union will be imperiled.

But we are not there yet and things are so good that there is talk--nay suggestions--that the Fed moves 50 b.p.s on Wednesday. I don't think so but how sentiment has changed. Janet? Janet who? What the heck, Babe, you had some good, long innings.

We will see what tomorrow brings because I have a feeling that this thing is getting to the day-to-day stage.

FINITO LA MUSICA?

The ECB and the EU (Germany) today denied the request of Monte di Paschi (Italy's) to delay their capital raising exercise until 2017 due to the fall of the Renzi government. As suggested, the Northerns would love to see Italy nationalize the bank despite all sorts of rules against such actions (to be fair there is a a route to be followed) and the Italians may do just that. This is entirely a political game now as the thought of bailing out an Southern tier bank...especially an Italian one...is verboten guess where. So here we sit, going into the weekend with markets in disarray Over There and the thought of what this just might mean.

The Italians, it seems to me, have little choice. New equity from private sources is out of the question but without the possibility of the same I would think that we will see a run on the institution leading to certain failure without intervention. However, if the bank were to be intervened by the Italian government the political cost will be enormous.

Monte di Paschi is Italy's oldest bank; indeed, one can say it is Italy. Intervention by the government would undoubtedly result in total losses for subordinated debt holders, major losses for senior bond holders and a wipe-out of all equity for all practical purposes. The debt and equity of this bank is not held by funds: much of it is owned by the Italian public because of the bank's history and status. What looms before us would have been unthinkable a few years ago. To many it is unthinkable today. The decision to be made over this weekend--if one is to be made--will probably shape the future course of Italy and I suspect the European Union as well. What may have to be done will probably insure the election of a coalition dominated to a great extent by 5 Star thinking and resulting in first, the rejection of the Euro as a currency (or some sort of crazy dual currency experiment) and ultimately, the exit of Italy from the Union. And that will be that: The Fat Lady will have sung. Finito.

So, what was to be, in my mind, a fairly quiet weekend and year end is turning into perhaps one of the most momentous weekends in European history...or not. This is one hell of a game of chicken being played and for not the first time Angie and the boys may have misjudged things. I must admit that I am not well-enough versed in the details of the rules and regulations Over There concerning matters such as this so there may be some wiggle room, but from what I can presently see, there isn't. The Italians have but one card to play and if they play it...

Have a great weekend.

SUPER MARIO (AGAIN)

You have to admire the guy. Sr. Draghi pulled another rabbit out of the hat today which in the long run will have no effect upon the overall situation at all but in the short term will keep a lid on things and provide time for the politicians to get it right or wrong depending on one's view. Mario left the discount rate unchanged and continued his QE program through September of next year BUT he reduced it in size from 80 billion Euros a month to 60 billion. "It's not a Taper" says Mario. Well, of course it is but that statement allows anyone to call it what one wishes and solves--to an extent--a couple of gnarly issues for Sr. Draghi. When everybody else in the world is tightening he can tell the rest of the world, "So am I," but at the same time he can indicate to the Euro Zone that he is fully behind them. Clever, our ex-Goldman Sachs Man in Italy---oh, you didn't know he was a Goldie? Yep. Another one.

There were two other things that Mario did, far less politically motivated but perhaps more important. Before today the ECB was limited in it's asset purchases by the interests rate on the assets purchased. They could no go below -0.4% which is what the ECB pays on deposits to European banks. That standard effectively had wiped out any purchases of shorter-dated German paper and making it quite difficult to find enough paper to fulfill the monthly quota with obligations of lesser mortals. It also created an "ECB Put" which in turn created artificial value in other instruments. No longer is the thought. In addition, the minimal maturity of such purchases was reduced from 2 to 1 year. Clearly, this should afford a greater stock of debt BUT it is also designed to steepen the yield curve with emphasis on the short end which is thought to be a very good thing indeed for Mrs. Monte's little boy, di Paschi and all of his playmates. Bank shares Over There shot up at the news. Super Mario.

Of course it doesn't mean a damn thing. Our German friends would call it a nebelwerfer or fog thrower designed to hind the fact that the banking sector still stinks and the Italian banking sector is like walking into a gas chamber. But no harm done and whatever buys time for whatever might come can't be all bad.

Of course the real problem is that money is fungible and so are rates which will continue to rise as the euphoria surrounding the prospects of the United States remains in place. The Euro got hammered again today and will probably approach par in a month. Problem is I don't know if, in these crazy times, if anyone has a clue as to whether that is a good or a bad thing. What I do suspect is that there are some bond portfolios that have really been hammered but so far no real signs have emerged. That could be a major issue if my supposition is correct but for the time being everyone seems very content to simply buy the index. And I Romani? I have a classmate who happens to be a priest who lives in Rome. He claims it is his earthly reward although nothing works particularly well and the garbage men are on strike. "Must be tough," said I at lunch yesterday. "Tough," said he. "There is no such word in Italian. In Italy one lives as well as one can and is happy to do so. After all, it is Italy." I should have gotten him in touch with Massimo a long time ago. Massimo has lived well, and...then again...Massimo and a priest.........Quite a thought.

BANKS, BUNK AND BAIL-OUTS

The latest bunch of nonsense flying around Europe is that the Italian banking situation is really not systemic at all, it's simply a problem of a couple of institutions that can be easily fixed. Yes Monte di Paschi and Unicredit might have a few difficulties but nothing that a patch here or there couldn't fix. The rest are fine. Unicredit is talking about 13 billion Euros in new capital and Monte di Paschi...well, 3.5 billion would be a good start. One minor problem: nobody has the slightest idea where that kind of coin can come from and it sure isn't coming from anywhere until Italy has a new government and there, My Son, is the rub. Italians are not noted for the formation of a government at the drop of a hat: killing one off, yes but forming one? A big no to that

There is another current through all of this running north to south. Italy really hasn't stepped up to the plate in the same manner as their norther Union members. What wouldn't trouble the French and the Germans in the slightest is for the Italians to engage in some form of nationalization which gets them off a very nasty political hook regarding a bail-out either directly through the Union or the ECB in what is shaping up to be a very ugly election year. Against the Charter? Who cares when one is in survival mode. Which brings us to the ECB.

Mario is in a hell of a spot. We should remember that the concept of a united Europe came about not solely as the result of a desire to reduce nationalist tendencies but as a buffer against the hegemony of the United States as well. At this moment in time neither reason seems to be working especially in regard to the United States which is now expected by many to be the engine of economic progress in the coming year. As a result, rates are moving smartly northward, currencies are weakening against the dollar, the Fed is certainly going to begin tightening next week and Sr. Draghi has no choice but to continue his QE operation probably targeted at Italy in direct opposition to the rest of the world. The problem is he doesn't have enough ammunition to make a difference. Italy's economic prospects are bleak and with them it's banking outlook is bleaker. I don't envy the guy. As I said the best thing that can happen is we get through next week and wait for the Christmas Season to provide a respite. That would be the conditioned response but in times like this, who knows.

NOW WHAT?

Over Here, the jobs number came in bang on at 178,000 and every one went back to bed. The Donald is a Rock Star; it's great fun to watch the NY Times, MSNBC and CNN go slowly, collectively insane and everybody is buying equities and selling bonds and getting rich while doing it. So far so good. Even what was supposed to be the greatest foreign policy flap in history, the taking of a phone call from the President of Taiwan (OMG!!!!) fizzled. The guy is either really lucky or a hell of a lot better than anyone expected. Then again, he isn't in the job yet. Then there's Over There...

The Union dodged one bullet this weekend but took another one in about the eight-ring. Austria rejected a far right challenge but Italy soundly rejected PM Renzi, who promptly resigned, and with him it is thought the continuing concept of Italy remaining in the Union under Brussels. That remains to be seen but in the effort to form a new government things are going to get very messy indeed with predictions already emerging that Beppy Grillo and the Five Star movement just might pull it off and be in the driver's seat in the formation of a new coalition. How long it will take is another issue, the time line not only affecting the much-needed resolution of the Italian banking situation (nothing can be done without a government on an EU level) and the soon-to-come election in France which could be affected by either a government in place or NO government depending upon the trending politics in the latter situation. The Italians could very well drag this thing out through the French elections looking for emotional and political support--for either or any party! If the more populist Monsieur Filon comes out a clear winner, that is one thing, but if Mdm. Le Pen attracts enough support to become a force with whom one must reckon...well, that's a very different situation indeed. The certainty is that France will be governed far more to the right than under the past years with Frankie Holland in charge...as will Italy. Just how far right is the question. The survival of the Euro is no better than 50/50 at this point and of course we must keep in mind that in the Fall it's Angie's turn. Would she sacrifice the Euro in order to salvage what would remain of the Union and herself? There's too much space between now and then to answer that but we should keep in mind that the Union came before the Euro and that there is a growing body of opinion that holds the view that it (the Euro) wasn't a very good idea in the first place.

With all this going on, the markets were surprisingly quiet with the Euro holding firm after an early trading dip and that is a good thing. Of course the Italian result was widely expected but a positive none-the-less. Another good thing is that all of Europe has about 10 days left in the working year so if the lid stays on for that period we are looking at mid-January as the start of the Great Political Dance. I think the Italian banking system can stay above water for that long but what I'd like to talk about tomorrow is the problem all of this causes for the ECB and Sr. Draghi. The Grinch showed up early for him this year.

OLD HOUSE, NEW HOUSE

Ours. We've spent the past few days selling our present abode and buying a new one, so this is going to be short. It has been an emotional experience which also makes it hard to write.

OK, we can probably say we are in the midst of a bond rout with the 10 year closing today yielding 2.44%That is one hell of a move since the election boys and girls indicating that suddenly the entire Street and a good part of the investing world are positive on The Donald or at least what he might mean for the economy. Whilst I normally pay little attention to the consumer confidence number this week's move upward to over 100% was equally extraordinary. Of course equities are like a rocket ship aided in no little degree by the announced deal to cut oil production ...more on that in a bit.

Tomorrow brings the jobs report which suddenly is more or less meaningless absent the political ramifications. Estimates are up 180,000 but once again the quality of what is being reported is open to serious question. In an age of big data one would think that there could be more of a delineation between bedpans/burgers and quantum physics hires but one has to really struggle to find it. Memo to President Elect: better reporting is something we desperately need along with believable data which half the time we haven't received. but right now there are a lot of people around the world staring with shock and awe at where the U.S. appears to be headed and whether Mr. Trump's promises in regard to role of government are about to be fulfilled. If there is one consistency since his election it is that his Cabinet appointments are doers--you may not like what they do but there are damn few theorists named so far. To think this is not being closely watched globally is to be sadly mistaken...especially Over There. That election cycle is coming around at precisely the wrong time for Europe's entrenched interests even in Italy which of course votes this Sunday (Memo to Us: the whole world votes on Sunday, why can't we?). And even there, the word is "change;" we just don't know what kind it will be.

Finally...oil. The agreement will last in practice for about a month and then the leaking will start and become a flood. My buds in the West Texas Town of El Paso tell me there's more damn oil and gas out around their place and in the Permian than anybody ever dreamed about and Good Ol' Donald gonna let us go git it. And don't forget them Mexicans, they say. They gotta get their production up and they need us and the money to do it which they only git if Good Ol' Donald gits himself a deal on NAFTA otherwise that boy just gits up and walks away from the table. Now I don't know whether these guys are right or not but in this business it's a lot what people believe that counts. They are believers.

Jobs number tomorrow. Whoopy damn-do.

STELLA CINQUE

I asked Massimo to predict the results of the referendum.

"Stella Cinque."

"5 Star? wha..."

"Si, 5 Star. That's who win, ma I'm not sure."

"Massimo, you have never been unsure about Italian politics in your life and now all of a sudden you're unsure!"

"Look, Charlie all of your geniuses say Clinton gonna win. She lose. All of our geniuses say the referendum gonna fail. Ma I tell you this is no good year for geniuses. This is a crazy year."

"But if it fails then Beppe Grillio becomes the kingmaker, right?" Will the Italian people allow a comedian to run Italy?"

"No, Charlie you no understand. Beppo...he runs nothing, Beppo just talks. But what he say alot of people like. He like your Trump. He knows what people want to hear but the problem is Trump has smart people around him who know your government. Beppo...Beppo has nobody. Beppo has..how you say...dillitante."

"Amatures."

"Si, amatures. So if the referendum fail and if Rienzi resign, we get new elections next year and then 5 Star can become a big part of the new government." And that's why I no sure that the referendum fail because we Italiani are not all pazzo, eh. I think just maybe enough people say we can no let this happen and while they no like Rienzi they are too scared if 5 Star...how you say...set the agenda."

"What would that look like?"

"Oh, Madonna, who knows? They hate the Union. They hate the Euro. They really hate the Tedeschi. They say 'They killing us again' like the war wasn't enough. And you know? A lot of people agree. So if it their agenda, CIAO!" I think so; I don't know how you stop it. And of course the first thing that goes is the banks. Charlie, they need a hell of a lot of money. You think we get it from the Union or even Mario if the referendum loses? You think we do?"

"Massimo, ordinarily I would say no but I wonder if the other Euros will look at it as there not being a choice. I mean, if the banks go, the Union goes because Italy will have to get out of the currency and that will be the end. But, God, what a choice that is!"

"Like you Americani say, 'You tellin' me!' Which is why Charlie, I'm not sure what happens. Too many people undecided, too many worried. Me? I vote "Si" but I no know."

"So we wait."

"Si, Charlie, we wait. Ciao, mi amico. Mi amore ala bella donna."

"Certo, Massimo, et ciao a te."

RETURN

Sorry about last week. I couldn't do it Monday and Tuesday and then it was off for Thanksgiving. It has been a rough few weeks and seeing the grand kids certainly helped. Anyway, let's try to catch up by highlighting a few events of what is a rather important week before us.

The transition of governance continues apace Over Here with some of our major institutions such as the New York Times and NBC still in a total state of denial and in some cases approaching madness in contemplating a Trump administration. It's a bit fun to watch but at at time when a true healing is much needed the attempts of the political left to continue to de-legitimatize Trump himself are becoming overwhelming by the new attempt to de-legitimatize the election itself with ridiculous calls for a recount in three states that Hillary couldn't have possibly lost...I mean...like...could she? I could care less but this stupidity demeans discussion on real issues and will no doubt provoke a backlash among Trump's more ardent supporters who not on;y have the wind at their backs but the votes as well. At a time when solid reasoning and debate are needed, we run a good chance of getting...another two years as we had under Obama? For those who don't live within these borders and may have a hard time understanding what this is all about, allow me to make one of my rare forays into the political thicket. It goes like this.

Hilliary won the popular vote by a plurality. So what. In our system, it is the electoral vote that counts and that may not bode well for the Democratic Party in the future. The Dems are the party of the coasts; the Repubs have everything in the middle and the urbanization of America may not be the sure thing that has been spoken of almost as Gospel over the past few years. Yet, with the majority of votes in just two states, California and New York, a Democratic candidate might just win the whole thing in the future if there was no electoral college. This is the first battle in that fight. A change would require an amendment to the Constitution and that is no easy thing. It would also logically require a change in the nature of government to a parliamentary system. So much for We the People of the United States...and--whether you like it or not--the greatest political document ever written. Then again, perhaps it is time. Keep this analysis in mind as we navigate through the next few years in out history.

Anyway, the week to come. The ECB gets together on Wednesday and quite frankly I have no idea with what Sr. Draghi is up to although I suspect not much at the present time because in Europe as Over Here, political events are beginning to supplant monetary events as the driving force as, IMHO, they should. And there is a very big political event this weekend in Italy where a referendum proposed by the prime minister, if supported, could change the political face of that country forever and almost assuredly, the political face of the European Union. It is far too close to call but I have booked a call to my friend Massimo for tomorrow and as a result I expect to have a better feel for the situation by deadline time tomorrow.

Oh yeah, we have a job number on Friday that supposedly will make the decision for the Fed in December. Don't waste your time. The Fed will raise a quarter point and try to get the hell out of the way, allowing markets to drive the monetary scene for a while and--hopefully in its mind--getting out of the bore-sight of the incoming administration where it has very few friends. Survival, even at that high level is a very basic emotion.

More tomorrow.

THE ADMIRABLE HARRIS

I lost John Harris today. He was one of the smartest, funniest, experienced and sardonic bankers I have ever known. Better to be set upon by a pack of hounds than John. He didn't suffer fools badly, he suffered them not at all. And yet he was one of the kindest of men and a simple joy to be around. I hired John; we were together for years. To his wife, Judi, herself a pioneer for women in the world of banking with Citibank in Asia and his children, my heartfelt sympathy. In his career, John had done it all and just about everywhere. This was the last thing left for him to do. Goodbye my dear friend.

Have a great weekend.

A MIDNIGHT CONVERSATION

He Who Knows All Things called late last night.

"You know why he saying those things, don't you?"

"Who?"

"Stan of course. What are you, drunk."

"No, I'm asleep."

"Oh. Anyway, do you know why?"

"NO, I DON'T KNOW WHY!" Alright, alright, because he has to. Happy?"

"Actually, yes. I'm rather pleased you came so close. I would not say 'had to' but 'needed to'."

'Like there's a difference?"

"Oh yes, there's quite a difference. "Had" implies a need, while 'needed" implies a conscious choice. You see..."

"No you may see, but at midnight not only don't I see but..."

"...You see, what Stan was saying is, "look gang, we are thinking about these issues and you had better be thinking about them as well.'"

"Hummmmmm."

"Just what do mean by Hummmmm?"

"That means I'm thinking. Problem is I don't have a solution to the problem if there is a problem."

"Oh, there's a problem all right and the other problem is that no one knows if the Fed has one either." Oh for that matter if any one there is working on a solution."

"A cry in the wilderness, then?"

"Not quite but certainly a suggestion what with the new administration in town if there is to be a solution now is the time to find it."

"And for this you called me at midnight?"

"Not for me, Charlie, I'm somewhere East of Suez. Middle of the day here."

"What the hell are you doing there."

"Solving problems, Ol' Son, solving problems."

I hung up. GOD! He's a pain, but as usual he was right.

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Ten Year was all over the place today closing at 2.30%. Let's hope we don't have an "event."

ANOTHER STANLEY CHAT

Stan Fisher was at Brookings yesterday. Subject? Market liquidity. I urge you to read the text as I think it is one of the most important topic that we shall face in the coming months. I wouldn't dare to paraphrase Mr. Fisher nor disagree with him but the latter course, if one were bold or dumb enough to take it is not really necessary in this case. I must say, Mr. Fisher is like an Alan Greenspan squared from the standpoint of trying to determine his real position on a subject. The difference is he lays out the arguments so clearly and consistently on both sides, dropping hints here and there, leading the listener or reader to what appears to be the "Ah Ha" moment only to remove it in the next three lines. It's really a terrific piece for those who have an interest in these things.

In the end, Stan reaches the opinion that liquidity in today's markets is "adequate." Of course what "adequate" really is is not fully understood. His arguments are data driven but he freely admits that while there may be more trading today (volume) there is also much more product that ten years ago. And while there are "flash events" they seem to have been handled by the system and while there is undoubtedly less market action by banks the slack has probably been taken up by other players such as hedge funds. All well and good and supported by, as mentioned, the data. Mr. Fisher has said precisely what the Vice Chairman of the Fed should say, but I suspect--and one finds it in the tone of this speech--that he has not said it all.

In the past eight years, there really has been one way traffic in the markets and while there have been a few twists and turns, the general trend has been towards massive increases in debt both governmental and sovereign, declining interest rates and reasonable if not low volatility except for brief periods of disorder and "flash events." Not to be forgotten is that inflation despite monetary creation on the part of central banks has for all practical purposes been non-existent due to a variety of factors not the least of which have been low energy prices and a severe decline in economic growth in mature economies due primarily to governmental policies. That is about to change or at least the markets, over the past month or so seem to believe that things are changing.

It is one thing to say that in such a benine period what we have is doing just fine and quite another thing to expect that markets will react in the same manner in a period of heightened and continuous stress. Liquidity is never really an issue unless you need it...and then it is the only issue. And where I would take exception to Stan's analysis is in this: Paul Volker once said, "Banks are different." Banks and certain street firms were true market makers. Solomon Bros. was probably the best of the lot. In any issue in which they were a market maker there was always a bid...you might not have liked where it was but there was always a bid. If you needed to move Treasuries, there was always a bid from houses like J.P. Morgan, and Bankers Trust and others. Hedge Funds are not banks. There will not always be a bid and that becomes important not in times such as we have just experienced but in the future which by definition is unknown but about which warnings are being issued by the very people who might require the liquidity and...which is the true irony of the situation...may themselves be creating the need through the fear of circumstances which few of them have experienced. Stan mentioned in his talk that inventories at reporting institutions are down nearly 50% in the past eight years. Yet the amount of debt outstanding has doubled. If the VIX is any indication, risk has increased. So has the chance of a "tail event" which is the new catch-word of today. It seems that "Black Swan" tended to scare the crap out of people. By definition, you cannot prepare for whateever you want to call it. But you may be able to mitigate its consequences. We weren't ready in 2009. For a variety of reasons 2017 may be a really rough ride.

BACK TO BASICS

...with one small interruption. Obama was in Greece today and the presser with the Greek Prime Minister Alex Tsipras, was something to behold. I never thought I would say it but Alex was the only one on the stage with a remote grasp of reality. The other guy...

Anyway back to basics. Things slowed down a bit today with the 10 year slipping slightly which was of course to be expected. Yet the two year closed over 1.00% and everything around the world was coming back into positive yields being dragged along by the U.S. market. Up were equities again with the NASDAQ the star performer as the rotation continues into the "Trump Economy" although if you really try to pin people down as to just what that may be things get a bit mushy except that everyone seems to agree that financials and especially banks are the place to be as the regulatory picture we almost certainly appear far brighter.

A harbinger for that view came today in the audit report on the Fed's "stress tests" requested by the House Banking and Finance Committee whose Chairman may just wind up as Secretary of the Treasury. While not as damning as some might have expected (or hoped), the report none-the-less did highlight that the Fed was far from transparent in it's approach. This is going to be argued for weeks but let's boil it down to what is really important. The objective measurements of the stress test are really no problem despite what the banking lobby would have you think. Basically, they concerned with capital adequacy and to be honest while some might think that the levels may be set too high the banks really have no problem in meeting anything that might be required. Do they infringe upon ROE? Sure, of course but not to the extent as do some of the other regulations in Dodd/Frank. But the subjective tests...ah, that's another deal entirely.

To say that the Fed can make these up as it goes along is very close to the truth. To begin, the banks have little idea as to what they are and NO idea as to the methodology by which these things have been invented. They are unique to each individual bank and can be as subjective as to the distribution of the risk assets. That is bad enough but think of it in the context of a nut job like Big Danny Tarullo running the show with crazy Lizzy looking over his shoulder. Subjective means subjective: if he doesn't like you, tough nuggies. This is exactly what happened to Citibank two years ago. You see, Danny doesn't like international exposure whether he understands it or not, and guess who is the only real international bank in his small world.

Bad? Yep, but it's not the biggest problem. As administered, what the Fed has supplied to itself is a legislatively approved power to--if they were so willing--distribute credit through the regulatory process..."We don't like this in your portfolio; we would like to see more of...say...non-prime housing loans, or green energy projects, or loans to make widgets." Now where have we seen that before? Do we really want these guys to--as we allowed Barney Frank to do while spitting all over the House conference room, "Roll the dice on this one?" A thought for your day.

And before we close a thought for the President Elect. Be careful for what you wish. China, your bete noir when it comes to currency manipulation announced today that they expect the Yuan to be in the 6.90 range by year end. A boon to Chinese exports? You bet. Currency manipulation? Only if one considers a Trump victory to be a manipulative tool in creating a roaring Dollar market. This stuff gets complicated, Donald. Don't move too fast.

THE ROUT CONTINUES

The ten year actually hit 2.30% today before falling back to 2.26%. It's been orderly but clearly there is some real blood-letting about and may well be more before this is all over. For a bunch who were damn near proclaiming the end of the world two weeks ago if Trump won, everyone seems to have jacked up their economic projections and with those their expectations on interest rates. The Obama legacy is considered ruined; the Clintons dead politically; the Democratic Party shattered; Conservatism rampant. All nonsense of course but for you non-American readers there is something quite important to keep in mind politically. In two years we will have another election and this one will involve over 30 Senators from Trump states with a lot of those seeking reelection being Democrats. Trump needs two decent years and if he gets them he may have an unassailable majority in the legislature over the remainder of his term. Look for him to hit the ground running in January with his new mantra being not "The Art of the Deal" but "The Art of the Doable." The guy will look for successes and consequently, I suspect, that the dreams of radical change held by some people on the right might not be fulfilled in the first two years of a Trump Presidency. After 2018...look out.

Where might the problems lie? Oddly, perhaps, I do not believe domestically. Europe to me is a serious question mark as there is no doubt that the forces which powered BREXIT and Trump are at work which could very well result in the dissolution of the Union or at least the beginning thereof. It is vital, I think, that European leaders recognize that an economic union is far more important than the dream (myth?) of a political union; at least one as is now envisioned. NATO for the time being is vital and I suspect that the cadre of advisers around Trump will convince him of that. As to claims that NATO can only survive in a strong political union...rubbish. NATO best times were when there was no Union at all. It is not the politics but the threat, and there is a threat exacerbated for the past eight years by--rightly or wrongly--Putin believing that Obama was an empty suit. There will be a period of assessment on both sides as the new year start. Trump, whether he realizes it or not has a strong hand, particularly if the pundits are correct and the economy takes off. Whether he plays it well remains to be seen.

I'm especially interested in the Cabinet appointments for Defense and Treasury--less so for State. Frankly, State doesn't count for much any more given its stewardship for the past eight years which has turned it into almost an after-thought. If he gets it right and with is what is clearly a mandate of sorts the guy just might pull this off. We'll know pretty soon. What is quite surprising is that it appears that his gang have actually been planning this for some time in stark contrast if one would remember, to the opening months of the Obama Presidency where the rule of the day was chaos. Who knew? Not the the New York Times...that's for sure. If you want to have some fun, read the Gray Lady for a few days. She has lost it...completely lost it. Delicious. And thus ends my political commentary. Back to Banking and finance...I promise.

STANLEY FISHER

In a conference hosted by the Central Bank of Chile of all people, Stanley Fisher revealed that in his opinion it looked as though it was about time for a gradual rise in interest rates. So much for uncertainty. The Fed will raise in December and continue to raise until...well, until it catches up with the market. Oh, the 10 year closed at 2.15% today.. From the standpoint of economic meddling, the Fed is dead and I would bet that the happiest guy in the room is Stanley.

What we are looking at in the near future is exactly what Stan Fisher has been quietly calling for and hoping for: if there is to be stimulus let it be of the fiscal kind and with it let there be a restructuring of economic governance in taxes, regulation and alike that has been so long needed in this and other western economies. I don't know what are Mr. Fisher's politics---frankly, I don't know if anyone does--but I suspect he is appreciative of how the markets are responding to Mr. Trump's election and taking the Fed out of a nasty little corner into which they had put themselves.

They are not out of the woods of course. There is a little matter of $4 Trillion on their balance sheet that they have to work off and there are rather clear signs that inflation is afoot the containment of which is their primary (some think otherwise--some are wrong) mandate through monetary governance. Spilling their balance sheet into the world is not exactly compatible with controlling inflation but this was always going to happen and one can only hope that there have been a few good folks thinking about this. And while we are on the subject of thinking, think about the greatest reversal of sentiment we have ever seen. From stated fears of total destruction of all things in the event of a Trump win we have seen the Masters of the Universe turn on a dime and buy the DOW to an all-time record close in the space of three days. Who the hell in their right mind would give their money to these guys to manage?

From now the tale will become how much of the Obama "legacy" will be dismantled in the next six months. Big Danny Tarullo will probably, in an operational sense wind up sleeping with the fishes if he doesn't decide to slip out the back door into the loving arms of Crazy Lizzy who, believing she is Ms. Clinton's natural sucessor, will want no part of him (she needs money...Wall Street has money...Wall Street hates him). Dodd/Frank will catch a good kicking but not entirely disappear which may not be a bad thing although how they are going to fix it is beyond my poor powers of comprehension. Somebody had better start thinking about the BIS meetings at which risk accountability will be a primary topic and since the meetings start on January 9, all we have is a very lame duck bunch of bankers and regulators to carry the flag. Not good. There had better be quick thought and even quicker action on the part of the Trumpsters in getting a message Over There and finding the right people to do it. Hint: Lael Brainard is not one of those people. I can supply a few names if anyone is interested. This could get ugly...more on that at a later time. There is so much more.

But the really great thing to watch in the coming months will be the interplay between the Trumpsters and Chuck Schumer in the Senate. Chuck replaces that most odious of creatures, Harry Reid, and while he will become the leader of the "loyal opposition," Chuck has always known on which side his bread is buttered and that is the side that reads "Wall Street." He's a nasty piece of political work but he's in a tough spot. Lizzy on his left, the Street (now) on his right, and his buddy The Donald in the White House..oh yes, they are good friends. This could be better than "Hamilton." The happiest guy around? Why me of course! I have material for at least...two years?

Have a great weekend!

A NIGHT TO REMEMBER

We need Walter Lord to write this one. It was simply the most unexpected, remarkable political victory in the history of the nation. At least it was reported as such. But I must tell you, here in the Fly-Over Zone there was no real surprise, rather there was a quiet feeling of satisfaction. On it's path the the Eternal City the Beast slouched its way through the Heartland and in record numbers, the people rose up and followed. What was remarkable was that the Best and the (self-proclaimed) Brightest never saw what was laid out before them and like their cousins Over There, listened only to themselves. A shocking indictment.

Sometime after midnight I checked on the markets. DOW futures were down in the neighborhood of 800 points and I thought that today would be the blood bath of all blood baths. It was but not in equities. The Dow closed up 252 revealing two things: the panic was probably in the Asian market and Over Here, people were not quite so confident of the outcome as they let on. The PC babble was loud and clear--the positioning was flat to slightly long. It stayed there and the markets caught up.

But the truly astounding this was the ten year. From 1.72% yesterday to 2.064% today. A move the likes of which I have never seen. Somebody got killed; who, we should find out at a later date. Of course this also takes the Fed off the front pages. They are now playing catch-up to the markets so the chances of a move in December are now 100%. Will it be 25 b.p.? One could argue for 50, but I think there will be gradual steps. After all, Hilliary doesn't need help any more either.

Another thing that should be retained: The Beast is still slouching. Frankie Holland is next in his sights early next year with Madame LePen no doubt growing more confident by the minute. And then points South and West. This is almost a bigger story than will be Trump's first 100 days. A lot changed last night and a lot more will change. Whether it will..or can...be embraced is another story.

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