Notes From Underground: Angela Merkel Finally Faces Facts

May 22, 2017

Angie Angie

where will it lead us from here

Oh, Angie don’t you wish

Oh your kisses still taste sweet

I hate that sadness in your eyes, but Angie Angie

Ain’t it time we said goodbye  [Richards and Jagger]
Today, German Chancellor Angela Merkel openly admitted that the German trade surplus was large because the ECB‘s monetary policy rendered the EURO to a bout of severe weakness, which helped make “German products cheaper.” It continually amazes me how forthright politicians become once the political storm clouds have lifted. When President Trump noted a similar view he was criticized for trying to force a break-up of the European Union. What was Angie’s angle in challenging the policies of the ECB and Mario Draghi? As I have written for the last six months, the ECB was going to become an issue in the upcoming German national elections. It appears that the Chancellor is getting ahead of the AfD and other challengers about the negative impact of Draghi’s policies that punish and financially repress German savers.

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Notes From Underground: Warren Knocks Out Mnuchin

May 18, 2017

In Thursday’s testimony before the Senate Banking Committee, Treasury Secretary Steven Mnuchin took a beating from Senator Elizabeth Warren over the issue of Glass-Steagall. There are many policy issues in which I disagree with Senator Warren but when it comes to Wall Street regulation, she is one of the most knowledgeable people in the Senate and far beyond those walls. During the Great Financial Crisis she appeared regularly on CNBC and Bloomberg television networks. While merely a Harvard law professor, she offered great insights and understood the depths of the problems that caused the crisis. If Jamie Dimon had not blocked her appointment as head of the Consumer Finance Protection Bureau (a wild conjecture on my part), she would not be a U.S. Senator. After president Obama caved in to Wall Street pressure, Warren ran for the Senate in Massachusetts in 2012, defeating Scott Brown.

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Notes From Underground: Nothing New to See, Except the Equity Markets Finally Added Some Risk Premium

May 17, 2017

The market did not selloff today. Risk was merely repriced and greater premiums were being offered in an effort to attract buyers. Everything discussed in this blog during the past six months was brought to light and the most important outcome was that the narrative has changed. The Trump agenda of tax and health care reform, and regulatory rollbacks was seen being delayed by the possible legal issues confronting the White House. Notes From Underground is apolitical and is solely vested in understanding the policy impact of any political outcomes, which is why it is geared toward political economy. Or, as Deng Xiaoping would say: “I don’t care if the cat is white or black as long as it catches mice.” Since Trump’s inauguration, the mainstream  media has been relentless in its effort to cast Trump in a negative light and the Tweeter-in-chief has certainly provided the tinder to keep the fires lit.

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Notes From Underground: A Review of Nehru Versus Nairu

May 11, 2017

Yesterday, Boston Fed President Eric Rosengren filled the airwaves with talk about the FED to be more aggressive in raising rates in order to prevent wage inflation from curtailing the current expansion. The continued concern from Wall Street about the POSSIBILITY of wage inflation because of FULL EMPLOYMENT reflects on the flaws in central bank’s models. Nairu (non-accelerating inflation rate of unemployment) is so 1970s, when globalization was just beginning and private sector unions had genuine bargaining power. The end of the Cold War unleashed hundreds of millions of workers to compete with workers in the highly developed and advanced economies. The fall of the Berlin Wall pressured even the strong German unions as the fear of jobs moving to Eastern Europe resulted in Social Democrat Gerhard Schroeder initiating the Hartz IV labor reforms which resulted in stagnant wages in return for some job security.

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Notes From Underground: Santelli and Harris Down By the Schoolyard

May 9, 2017

This is the most recent CNBC hit with Rick Santelli as we try to educate the world in another three-minute segment. This unrehearsed spot attempts to dig deep into the financial issues confronting traders and investors. The discussion about France is a continuation from the Notes From Underground post I wrote last night. I stress that the period ahead for Emmanuel Macron is going to be difficult, especially if the center-right wins the Parliament and thus the prime minister position. This summer will be fraught with street demonstrations as the Left moves to prevent any installation of German-initiated fiscal austerity and labor market reform. In typical French political fashion, labor and student groups are warning against Macron governing by decree and bypassing Parliament.

(Click on the image to watch me and Rick discuss French elections.)

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Notes From Underground: Au Revoir, Marine Le Pen

May 8, 2017

Now we can finally put the French elections behind us as its citizens maintained the status quo and elected Emmanuel Macron to a five-year term. Parliamentary elections follow in June but the two main parties, Socialists and Republicans, aren’t expected to face challenges. But, if the more conservative Republicans gain control of the Parliament and the prime minister post it will force Macron to move further to the right-center. If Macron moves away from the Hollande Socialist camp it will result in political protests from the Left. Macron will experience a difficult presidential term if the government is gridlocked by continual demonstrations. The German chancellor is going to ask a great deal from Macron: fiscal austerity, as well as a restructuring of the French domestic economy.

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Notes From Underground: Mario, Don’t Try to Lay No Boogie Woogie On the King of Rock ‘n’ Roll

April 27, 2017

Mario Draghi’s nonsense is a compost heap as he tries to continue his efforts to build the ECB‘s balance sheet to the point of no escape. The ECB president danced around inflation questions by generally holding to the view that inflation across the entire euro zone would have to rise to the 2% level for the central bank’s mandate to be met. Currently, Draghi holds to the view that the recent elevated levels of inflation are transitory due to higher energy costs. It was noted that there has been a decline in service sector costs, which could put downward pressure on inflation once the energy prices pass through the data. Draghi also emphasized that with the current unemployment levels in some EU countries there was far too much slack which keeps wages from rising. A positive point for the ECB is that it does not follow NAIRU as a major gatekeeper of wage levels. In his typical effort to elevate his position, Draghi applauded the ECB for saving the EU financial system and economy, but until the politicians make the needed structural changes there will be continued “substantial monetary accommodation” so the ECB can meet its inflation mandate.

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Notes From Underground: This Is a Vinny Barbarino Market (Or, I Am So Confused)

April 25, 2017

The global reaction to the first round of the French presidential election was not confusing. Capital was sitting on the sidelines as the polls reflected a possibility of a second round Le Pen/Melenchon faceoff, which would have been devastating for global investors because fear of an EU break-up would have led to a massive repricing of risk premia. The avoidance of such an outcome led to a rush of capital into European markets, which provided support to Asia and the U.S. The German/French 10-year spread reacted as expected. The yield differential narrowed by a significant 20 basis points. The BUND yields rose against all European sovereign debt as Berlin’s haven status was rendered null and void for at least another two weeks. The GOLD and YEN also performed as expected as money rushed to purchase a risk on profile in a global zero interest environment. The EURO rallied by 2% as global capital flows into European stocks forced previous short euro positions to the sidelines. There’s nothing confusing about any of these outcomes. But let me throw some confusion onto some of the other geopolitical events making the front pages:

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Notes From Underground: The Politics of the IMF and French Election

April 19, 2017

First, I am reposting part of the January 29 post as a reminder to pay attention to the narrative of Trump rolling back to the concept of Pax Americana. As the Trump administration begins to reveal its ambitions, there is a great deal of conversation about Trump becoming more presidential and that the “grown ups” are taking charge of policy. The demotion of Stephen Bannon ignited a discussion about the Wall Street crowd (Mnuchin, Ross, Cohn, Kushner) becoming aligned with the “Deep State.” The concept of the deep state is really the power of the entrenched bureaucracy as the primary source within the beltway.

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Notes From Underground: Treasury Takes a softer Approach to Global Monetary Affairs

April 16, 2017

On Friday April 14 Treasury released a report that deemed no major trading a currency manipulator but five countries have met two of the three criteria and therefore will be closely monitored. This report is very well laid out but it is not incendiary as it seeks to persuade with a very soft touch. The three criteria of meeting of being a “manipulator” are:

      1. A significant bilateral trade surplus with the U.S.of a least $20 billion;
      2. S current account surplus is at least 3% of a nations GDP; and
      3. Persistent, one-sided intervention occurs when net purchases of foreign currency are conducted repeatedly and total at least 2% of a nation’s GDP in a 12-month period.

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