Janet Yellen

It was a pretty interesting day in the market, of course, since two Fed-related items were happening. First, as was initially reported last night, "Damn It" Janet Yellen was nominated by Obama to be the Chairhuman, once bearded-wonder Bernanke splits in January. It's a little odd that in the midst of all this rancor Obama decided to address this bit of not-at-all-urgent business, but maybe he wanted to remind the market that all that matters is QE-infinity.

Unlike her predecessors, Janet Yellen has never had a youthful dalliance with hawkish monetary ideas. Before taking charge of the Fed both Alan Greenspan, and to a lesser extent Ben Bernanke, had advocated for the benefits of a strong currency and low inflation and had warned of the dangers of overly accommodative policy and unnecessary stimulus. (Both largely abandoned these ideals once they took the reins of power, but their urge to stimulate may have been restrained by a vestigial bias against the excesses of Keynesianism). Janet Yellen, who has been on the liberal/dovish end of the monetary spectrum for her entire professional career, has no such baggage. As a result, we can expect her to never waver in her belief that stimulus is the answer to every economic question.

Today 3:00 pm nomination by Obama of Janet Yellen as the next Fed chair was hardly news (certainly wasn't news to stocks which briefly dipped below their 200 DMA) in the aftermath of Larry Summers' self-elimination, but nonetheless the sellside brigade was quick to praise her now official nomination for one simple reason: it means more of the same Bernanke policies that have done nothing to benefit broad America, but more importantly have resulted in year after year of near-record Wall Street bonuses, and unprecedented asset bubbles. Why shouldn't the banks then be giddy with excitement that the status quo will not only continue, but the monthly $85 billion in liquidity may in fact increase in time? Below is a selection, courtesy of Bloomberg, of the most vocal praises sung on behalf of the former San Fran Fed president byt the numerous banks that currently exist only thanks to the Fed's actions in 2008.

It is worth remembering that Goldman, to much fanfare and media attention, “told clients” in November 2007, to sell gold. On November 29, 2007, Goldman recommended that investors sell gold in 2008 and it named the strategy as one of its ‘Top 10 Tips’ for the year.

• Janet Yellen, a Backer of Pushing the Fed's Policy Boundaries (WSJ)
• Jos. A. Bank proposes to buy Men's Wearhouse for $2.3 billion (Reuters)
• J.P. Morgan to Cull Business Clients (WSJ)
• RBS Said to Pass Currency Trader Chats to FCA Amid Probe (BBG)
• Prosecutors give SAC settlement ultimatum (FT)
• U.S. builders hoard mineral rights under new homes (Reuters)
• Bill Comes Due for Brazil's Middle Class (WSJ)
• US expected to slash aid to Egyptian government (AP)
• Samsung launches world's first smartphone with curved screen (Reuters)
• Microsoft’s $7.2 Billion Nokia Bet Not Luring Apps (BBG)
• China raises hurdles for foreign banks (FT)

For all expectations of a big jump in US futures overnight on the largely priced in Janet Yellen nomination announcement which is due at 3 pm today, the move so far has been very much contained, as expected, with a modest 90 minute halflife, as the markets' prevailing concern continues to be whether the debt ceiling negotiation will be concluded by the October 17 deadline or if it would stretch further forcing the government to prioritize payments. There is however some hope with Bloomberg reporting that some possible paths out of the debt impasse are starting to emerge with less than a week before U.S. borrowing authority lapses after Obama said he could accept a short-term debt-limit increase without policy conditions that set the terms for future talks. Whether this materializes or just leads to more empty posturing and televized press conferences is unclear, although as Politico reports, the stakes for republicans are getting increasingly nebulous with some saying they are "losing" the fight, while the core GDP constituency is actually liking the government shutdown.

UPDATE: For the 3rd time tonight 'someone' has ramped AUDJPY in a failed attempt to spark S&P futures higher

When Larry Summers stepped away from the nomination for Fed Chair, S&P 500 futures ramped vertically by over 20 points. The reaction to the nomination of Janet Yellen managed a limp 6 point surge in S&P futures. Worse still, it took 24 hours for the Summers-Out ramp to be cut in half... Yellen's 'ramp' has already given back half of her gains in 90 minutes. It seems The White House needs change of narrative - or just another bargaining chip to piss the Republicans off - and judging by the "sudden" rip higher in AUDJPY, 'someone' is trying desperately to spark some momentum ignition... but for now - it's not working. Timing is everything we guess.

All the histrionics over the next Fed chairman, pardon chairwoman, choice are over. WSJ reports that Obama is set to announce Mr., pardon Mrs Janet Yellen as Bernanke's replacement tomorrow at 3 pm at the White House. "The nomination would conclude a long and unusually public debate about Mr. Obama's choice which started last June when he said that Ben Bernanke wouldn't be staying in the post after his term ends in January. Mr. Obama gave serious consideration to his former economic adviser, Lawrence Summers, who pulled out in September after facing resistance from Democrats in the Senate." However, while a Yellen announcement, largely priced in, in a normal environment would have been good for at least 10-20 S&P points, with the debt ceiling showdown the far more immediate concern, the choice of the Chairwoman may not be the buying catalyst that it would have otherwise been.

"You don't need me to tell you that the developed countries, the US, Europe, Japan, are insolvent.... I don't want to paint  a picture of clarity about the workout of this thing. Because once a society, a financial system gets in a position of the central bank being trapped, and being unwilling or frightened of stopping this merry go round, things get very dicey. They may move to stopping the money printing, markets collapse, then they panic, go the other way... We are in a period where confidence should be jostled and it could be lost at any time for a variety of reasons, how this works out nobody knows.... There is one right thing to do right now: after five years of 0% interest rates, after $3.5 trillion here and several trillion sprinkled around the globe, this Fed chairman, the next Fed chairman, should say: "We've done enough. It is up to the president and Congress to remove the impediments for growth and provide the catalysts for growth, and help this country grow. The country is capable of growing at a far faster rate than it has been. And I think that the Fed, which is the only central bank which has a dual mandate, has embraced this dual mandate in a very harmful way because they actually revel in the role of being Atlas, holding up the world by themselves."

"Steve Jobs was really a pretty terrible man... and I just don't believe bad guys do well in the long run," is the subtle way the billionaire fund managed describes the ex Apple CEO before shifting his view to the broader market. A spell-bound Maria Bartiromo was looking for any silver lining when Julian Robertson responded ominously, "we're in the middle of a kind of bubble market," and when they "prick the bubble, there will probably be a pretty bad reaction." With views on The Fed's easy-money, Twitter, and market frothiness, Robertson is a breath of truthy fresh air that we suspect will not be back on the money-honey's show anytime soon...

With the government shutdown stretching into an improbable 4th day (and with every additional day added on, the likelihood that the impasse continues even longer and hit the debt ceiling X-Date of October 17 becomes greater), today's monthly Non-Farm Payroll data has quickly become No-Farm Payroll. However, just like on day when Europe is closed we still get a ramp into the European close, expect at least several vacuum tube algos to jump the gun at 8:29:59:999 and try to generate some upward momentum ignition in stocks and downward momentum in gold. In addition to no economic data released in the US, President Obama announced last night he has cancelled his trip to Bali, Indonesia, to attend the APEC conference and instead to focus on budget negotiations back at home - which is ironic because his latest story is that he will not negotiate, so why not just not negotiate from Asia? Ah, the optics of shutdown.

A week ago, we first reported that Bridgewater's Ray Dalio had finally thrown in the towel on his latest iteration of hope in the "Beautiful deleveraging", and realizing that a 3% yield is enough to grind the US economy to a halt, moved from the pro-inflation camp (someone tell David Rosenberg) back to buying bonds (i.e., deflation). This was music to Bill Gross' ears who in his latest letter, in which he notes in addition to everything else that while the Fed has to taper eventually, it doesn't actually ever have to raise rates, and writes: "The objective, Dalio writes, is to achieve a “beautiful deleveraging,” which assumes minimal defaults and an eventual return of investors’ willingness to take risk again. The beautiful deleveraging of course takes place at the expense of private market savers via financially repressed interest rates, but what the heck. Beauty is in the eye of the beholder and if the Fed’s (and Dalio’s) objective is to grow normally again, then there is likely no more beautiful or deleveraging solution than one that is accomplished via abnormally low interest rates for a long, long time." How long one may ask? "the last time the U.S. economy was this highly levered (early 1940s) it took over 25 years of 10-year Treasury rates averaging 3% less than nominal GDP to accomplish a “beautiful deleveraging.” That would place the 10-year Treasury at close to 1% and the policy rate at 25 basis points until sometime around 2035!" In the early 1940s there was also a world war, but the bottom line is clear: lots and lots of central planning for a long time.

European equities trade negatively as political tensions on both sides of the Atlantic dampens risk appetite and a lower than expected HSBC manufacturing PMI figure from China further weighs upon investor sentiment. In the US, government is on the precipice of the first shutdown since 1996 after House Republicans refused to pass a budget unless it involved a delay to Obama’s signature healthcare reforms. If the Republicans follow through with their threat a shutdown will occur at midnight tonight. As a result a fixed income in the US and core Europe benefit with investors wary of the immediate harm a shutdown will do to confidence in the economy.

This is at a time when we have real economic growth barely above 2% and nominal growth of just over 3% (abysmal by any standards) after six years of monetary easing and 5 years of QE1; QE 2; Operation twist; QE “infinity” and huge fiscal deficits. After last week Citi notes it is not clear that this set of policies is going to end anytime soon. It seems far more likely that these policies will be continued as far as the eye can see and even if there are “anecdotal” signs of inflation this Fed (Or the next one) is not a Volcker fed. This Fed does not see inflation as the evil but rather the solution. Gold should also do well as it did from 1977-1980 (while the Fed stays deliberately behind the curve). Unfortunately Citi fears that the backdrop will more closely resemble the late 1970’s/early 1980’s than the “Golden period” of 1995-2000 and that we will have a quite difficult backdrop to manage over the next 2-3 years.

First the House passed a spending bill that would avert a September 30 government shutdown, and extending government funding to November 15, however with an Obamacare defunding provision. Naturally, the Senate struck it down, and would propose a clean funding bill ex-any Obamacare defunding provisions, with a funding provision for an additional month. Moments ago, Boehner made it clear that the House is unlikely to accept a clean spending bill from the Senate, increasing the chances of a government shutdown after Sept. 30. "I don’t see that happening," Boehner told reporters at a Capitol press conference. So back to square zero, with Congress nowhere closer to a compromise, a continuing resolution just as unlikely as it was before the latest episode of grandstanding began, and five days left until government shuts itself down.