When the tracking of potential Ben replacement candidates for Fed Chairman by Irish bookmaker Paddy Power, and InTrade prop bet replacement, started it had Janet Yellen as a solid favorite. Shortly thereafter, as news leaked that Obama's favorite was Larry Summers, and as the president made it quite clear Yellen's candidacy was certainly not on the front Burner with the "Mr. Yellen" Freudian slip, Summer's odds soared and hit a contract high of 85% last week. Over the weekend, anyone who had put money on Summers, was Harvarded and lost all capital at risk, and now, it is Yellen who is once again firmly in the lead with her odds soaring right back to just why of 90%, and well-ahead of second placed Don Kohn at 17%. Ironically, while the market never actually corrected for the "market negative" that Larry Summers' candidacy is now spun to be, it is surely uncorrecting now that he is out.
It had become clear that the President's own political base in the Senate were not going to support Mr. Summer's ascendancy. The eye of the Press will now turn to Mr. Kohn, Ms. Yellen, who does not seem to have the support of Mr. Obama, and the long, though interesting shot, of Stanley Fischer. Mr. Obama appears to be easing into a lame duck presidency far earlier than once thought and the reality of Obamacare will hit Main Street on October 1 which may tip the scales further out of his control. It may not be either the best of times or the worst of times but very volatile times that mark this week.
"Market response - will add to downward pressure on bond yields and may be worth another 10-15bps on the downside. FX terms - hard to see it as anything but USD negative for now. Main buying opportunities probably high current account deficit EM, AUD,and JPY. Discussion of waning Summers odds had been in market last week so we would see impact on JPY in 0.5-1.0 percent range. Whether this puts Yellen in driver's seat is unclear, so this Wednesday tapering and FOMC forward guidance are still the focus. We still think tapering schedule rather than FOMC language will be the main market driver."
I am writing to withdraw my name for consideration to be Chairman of the Federal Reserve.
It has been a privilege to work with you since the beginning of your Administration as you led the nation through a severe recession into a sustained economic recovery built on policies to promote employment and strengthen the middle class. This is a complex moment in our national life. I have reluctantly concluded that any possible confirmation process for me would be acrimonious and would not serve the interests of the Federal Reserve, the Administration, or ultimately, the interests of the nation’s ongoing economic recovery. I look forward to continuing to support your efforts to strengthen our national economy by creating a broad based prosperity and to reform our financial system so that no President ever again faces what you and your economic team faced upon taking office in 2009.
"A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money ."
- Ben Bernanke, Deflation: Making Sure "It" Doesn't Happen Here, November 21, 2002
It seems this morning's trial balloon has set the gamblers off as PaddyPower shows that the probability of Larry Summers becoming the next Fed Chair has soared to over 85%. Just six short weeks ago Summers was a long-shot 20% probability and Yellen the shoe-in at 75%. In the meantime, despite over 300 economists putting pen to paper to demand more of the same monetary policy that has not worked; Summers is now more probable that Yellen was at the start. Of course, given today's reaction, traders may start to position for the seemingly inevitable though we suspect that - as usual - we will be told that stocks near their highs are already discounting this and any other potential change.
Earlier today, when we observed the overnight "news" floated by Japan's Nikkei we cautioned that the Nikkei is best known not for breaking news but for floating trial balloons. In other words, the report was merely leaked to gauge the market response. Sure enough, the response was gauged, and here comes the official news, shooting down this latest trial balloon.
- White House Is Saying Reports In Japanese Press That Obama Is Set To Name Larry Summers Are Wrong - Dow Jones
Sure enough, any modest USD strength accumulated on the overnight rumor, is now being promptly unwound.
There is also consensus among the people inhabiting the real world -the one that is found outside the ivory towers of the economics departments of all US and global Tier 1, 2 and 3 universities - that the only reason the world is currently in its sad, deplorable and deteriorating economic state (which however keeps making the rich richer), is precisely due to these same economists, whose tinkering and experimentation with DSGE models, differential equations, curved lines, and all such things all of which have no real world equivalent, and specifically due to economists like Greenspan and Bernanke. These two men, both of whom barely have seen the real world for what it is or held a real job outside of their academic outposts, who surround themselves with brownnosing sycophants and who do the bidding of Wall Street, are the primary reason for the current centrally-planned quagmire. Which is why we wonder: is the fact that some 313 economists (and counting) have signed a petition pushing for Janet Yellen (aka Freudian slip "he" if you are the president), and against Larry Summers, sufficient grounds to actually like the outspoken former Harvard head?
"What's more fun than a Barrel of Monkeys? Nothing!" What could be better than assembling a long chain of tangled monkeys, each reliant on those either side of it for purchase, with just the one person holding onto a single monkey's arm at the top end of the chain, responsible for all those monkeys dangling from his fingers. Of course, with great power comes great responsibility; and that lone hand at the top of the chain of monkeys has to be careful - any slight mistake and the monkeys will tumble, and that, we are afraid, is the end of your turn. You don't get to go again because you screwed it up and the monkeys came crashing down. On May 22nd of this year, Ben Bernanke's game of Barrel of Monkeys was in full swing. It had been his turn for several years, and he looked as though he'd be picking up monkeys for a long time to come. The chain of monkeys hanging from his hand was so long that he had no real idea where it ended... indeed, "
If the Fed really thinks that the rest of the world will have to "adjust to us" as it insists on draining global liquidity come what may, it may have a very rude surprise, yet again." One false move and all the monkeys may end up in a heap on the floor.
The highlight of today's economic releases will be the 8:30 am non-farm payroll data, expected to print at 180K jobs, up from July's 162K, and result in an unchanged 7.4% unemployment rate. The "most important jobs number ever " is neither, because even if it comes as a wild outlier to the good or bad side, the Fed is unlikely to change its tapering intentions this late in the game. Still, it will provide fireworks in a very jittery market and if the number is far stronger than expected, expect the 10 Year to finally blow out from below the 3% range which it breached briefly overnight, and never look back, at least not until there is an August 2011 wholesale risk revulsion episode and stocks tumble. Speaking of jittery, overnight the WSJ reports that if picked as Bernanke's replscament, Larry Summers' faces an uphill battle to get the votes of three key democrats on the Senate Banking Committee (Jeff Merkley, Sherrod Brown and Elizabeth Warren). It would be only fitting that the dysfunctional Democratic dominated senate now lashes out against the president, and in the process scuttles the market's only hope of maintaining its Fed-derived gains over the past five years... And there is, of course, Syria which is becoming increasingly problematic for Obama whose support in Congress is looking ever shakier. Will he go it alone in the case of a no vote?
Perhaps the reason behind America's moral, economic and social decay is, more than anything, the unprecedented apathy among the general population.
It is not a good time for Janet Yellen. The one time Bernanke-replacement favorite who many were confident would be the next Fed chair, and whose odds in the initial stages of the Fed race were 75%, is so far out of the running one can almost ignore her candidacy. At least if the market makers behind Paddy Power, and the Fed Chair market betting participants have it right. As of today, her odds have slumped to the lowest in the life of the contract, or 29.4%, below the 36.4% from mid August. The leader by an even greater margin: Larry Summers whose 2/5 odds, or 70%, mean that absent a material change in rhetoric, will be the person Obama announces as Fed chairman replacement over the next month.
September is likely to be dominated by a number of key event risks, in addition to ongoing uncertainty around the US growth outlook, the Fed’s reaction function and heightened EM volatility. We highlight the major events and likely market implications.
Gold looks to have found a base. Citi's FX Technicals retain a view that we can see a “low to high” percentage move in this gold bull market similar to what we saw in the bull market of 1970-1980. They add that if we extract the final leg of that move in December 1979-Jan 1980 which was totally driven by the USSR invasion of Afghanistan - almost doubling the price of Gold over 5 weeks - then we end up with a target of around $3,500 over the next 3 years or so. The charts below are compelling in that respect, but before we look at them we will indulge in some pontification...
There is a recurring nightmare that is playing out once again in many of the most leveraged asset-classes in the world's so-called 'markets'. The theme is that of an improving US economy which is pointing a normalization of US monetary policy. Good news, right? It would seem not; as Chris Wood's Greed and Fear notes, that the practical reality is that the emerging world, including Asia, will remain vulnerable to further selling so long as markets are anticipating normalisation of American monetary policy and a related strengthening in the US dollar. However, there is a conundrum, if the world was so sure of the relative strength of the American economy, surely the yen should be selling off more against the dollar. For CLSA the real test is yet to come when the new fiscal year in America begins on 1 October and the revival of US economic growth that is so hoped-for, does not materialize... and given the correlation in the chart below, it is clear that there is only thing that matters - the US 10Y rate.