ALERT: Bernard Connolly will be on Bloomberg Radio with Kathleen Hayes and Vonnie Quinn from 10:30 a.m. to 11:00 a.m. CST (that’s 11:30-noon for those on the east coast). Listen in to hear the wisdom of the smartest analyst in the realm of global macro.
First, as the clouds of sadness begin to lift I want to thank all of those who took time to send a note to the blog and to me in emails for the condolences on the passing of my mentor and friend. In a tribute to one of the great traders, the markets provided volatility reminiscent of a 21 gun salute, or maybe just 21% vol levels and a VIX to go with it.
The past five years have been a healthy, cathartic interchange of investment ideas that emanate from my 37 years of analyzing and trading the international financial flows that form the basis of global macro investment. Many themes of this blog are based on the knowledge I gained from years of university study and also from having great teachers about all things global. The list of teachers is long and includes Jim Sinclair, Paul Kimball, Leo Melamed, Oskie and Rony, and so many others who took the time to educate me and thus be able to pass lessons learned to my readers and students to whom I have enjoyed lecturing.
From time zone to time zone, there are signs of a broken financial system. This past weekend’s issue of Barron’s had a splendid article by Jonathan Laing titled, “Why Beijing’s Troubles Could Get a Lot Worse.” Laing interviews Anne Stevenson-Yang from J Capital Research. Stevenson-Yang is a long-time China watcher, speaks fluent Mandarin and has lived in China for many years. In the interview, Laing asks her about many of the problems that the media covers, but one of the keys in the Q&A was the following:
Q: How bad can the situation be when the Chinese economy grew by 7.3% in the latest quarter?
A: “People are crazy if they believe any government statistics, which, of course are largely fabricated. In China, the Heisenberg uncertainty principle of physics holds sway, whereby the mere observation of economic numbers changes their behavior. For a time we started to look at numbers like electric-power production and freight traffic to get a line on actual economic growth because no one believed the gross-domestic-product figures. It didn’t take long for Beijing to figure this out and start doctoring those numbers, too.”
Three years ago I wrote a blog suggesting that Bundesbank Axel Weber should become ECB President so that the Germans felt they had control of Europe’s monetary policy. My argument was simple: If the Germans controlled the ECB then Berlin MAY BE more willing to support a QE program. As Bernard Connolly argued 20 years ago, the French hoped to gain control of European monetary, thus remove the powerful influence of the Bundesbank. The French have worried that an ECB under the influence of German monetarist restrictions would favor tight money and with it a strong EURO. France and Italy have relied on the ability to depreciate their currencies during times of stress but a Bundesbank-infused ECB would be more reticent to follow the path of least resistance and the possibility of inflation.
Open letter to Mario Draghi: Grow some cojones! If the onset of deflation scares you and other ECB members, why is it that you do not have the intestinal fortitude to enact the QE policy that you have pontificated about for the last 30 months? Either deflation is to be feared or it is a straw man that elevates the your self-importance. On November 21, Mario appeared to announce that the time had come for the ECB to begin a meaningful QE program, but December 4 brought no action, just words. President Draghi, the honeymoon is over and it is time to reveal the testicles that can give birth to policy. Mario, if the Germans won’t compromise point to the EUR/YEN cross at 149 and ask Jens Weidmann how German manufacturing is going to compete against Japanese high-end engineering.
The Swiss referendum on gold purchases, and, more importantly, setting a fixed GOLD/RESERVE RATIO of 20 percent was OVERWHELMINGLY defeated by a Swiss electorate suffering from a lack of oxygen reaching their brains. THE ALPS ARE TOO HIGH! Swiss citizens voted 78%-22% in opposition to the proposed referendum, thus maintaining the present policy of supporting the EUR/CHF floor at 1.20 and continuing the building of massive reserves. Two outcomes tell us that the market was underwhelmed by the vote and that is the EUR/CHF remains at 1.2030 and the GOLD market reversed last night’s early selloff and closed above last Wednesday’s high of 1.201. The EUR/CHF should have been well bid today following upon the Swiss voters supporting the SNB in its endeavors to maintain the Swiss franc at a fixed level versus the troubled euro.
It takes readers to make a successful blog and I have been blessed to have readers who are able to add to the discourse that makes for profitable investments and trades. There is no one source for all the answers and a healthy give and take provides for better strategy. Alternative views sometimes urge caution and better trade selection then a one-sided discussion with myself. Again, my wishes to you for a Happy Thanksgiving. I am going to be on with Rick Santelli on Friday morning to discuss whatever he wishes. Hopefully, we’ll discuss SNB, Draghi and whatever else. If any readers have any burning issues, post them in the comments and hopefully they’ll get covered in a very tight time frame.
In the time of “secular stagnation,” the burden of economic policy has fallen on the world’s central bankers. Whatever the question of economic malaise the answer is to print money and stave off the fear of deflation. This is why Ben Bernanke was the captain of the ’37ers, the cadre of central bankers who learned that the mistakes made by the U.S. Secretary of Treasury and the Federal Reserve would not be repeated. As it goes, it is easier to stop inflation then it is to prevent the pains of a deflationary spiral. The central banks of all the developed world economies are in full stop deflation mode. Thus, when in doubt, PRINT.