Notes From Underground: MAN PLANS AND GOD LAUGHS

The people of Japan are under severe stress and deep anguish because of the cleanup from Friday’s devastating earthquake and tsunami. The readers of NOTES are well aware that my son, Tobias Harris, is a recognized analyst on Japanese politics and has been the recipient of Japanese hospitality on numerous trips and long periods of work. Our hearts go out to the Japanese people as they begin to come to terms with the massive amount of destruction and loss of life. As traders, we tend to focus on the financial ramifications of major disasters but the depth of despair and suffering for those caught in its wake is real and we should all offer our prayers and aid to the people of Japan. With that said, we know that as the human suffering is tabulated the world goes on and markets will be trying to come to terms with global financial impact.

Friday saw the YEN stage a rally as markets are anticipating the repatriation of massive amounts of money by Japanese global corporations and insurance companies. Also, the world’s reinsurance giants are going to have to assess the physical damages and calculate how much for which they are responsible. The news is awash with all types of rumors but I would caution that it is far too early to have the slightest clue. Compounding the confusion for currency and bond markets is the fact that it is Japanese year-end–which I wrote about just last week–means the coming impact of the massive roll off of Japanese debt and where investors would possibly seek higher yields. Last week’s analysis is now garbage for there are more important elements in play. Add in a scheduled BOJ meeting today and the financial markets have more variables in play. The markets are looking for the BOJ to cast aside all caution and move to make available all the necessary liquidity the system may need. Yesterday’s analysis is always subject to the old YIDDISH-fold wisdom: MAN PLANS AND GOD LAUGHS.

Outside of Japan, the biggest news story during the weekend was the supposed deal that the EURO ZONE summit was able to craft. I am confused about all the excitement about the deal for I find it fraught with loopholes. It seems that the deal was a “gift” to Chancellor Merkel to make her look like she has protected the financial interests of German taxpayers. The market is initially applauding the fact the EUROPEAN FINANCIAL STABILITY FACILITY (EFSF) will be fully funded to its 440 BILLION EUROS and won’t have to set aside nearly one-third of its value to ensure its AAA rating. Also, it appears that the PERIPHERALS have agreed to fulfill German demands that any country receiving a needed bailout would adhere to stringent budget and pension changes necessary to meet the standards of austerity. The stipulations of this agreement are very open-ended and the time line is suspect for when it would be fully implemented. Also, the EFSF will also be allowed to purchase SOVEREIGN BONDS FROM stressed governments but only when initially offered at auction and not in the secondary market.

This stipulation irked TRICHET as he was hoping to offload the 77 BILLION SOVEREIGN BONDS that the ECB had to previously purchase that he badly wants off the books. It seems that this agreement to buy bonds at initial auctions will set up great opportunities for BOND TRADERS as the EFSF places a floor under the market to ease the borrowing costs for the PIIGS. Once the auction is complete, market forces will come to the fore and the DEBT will sink to its real market price. I caution as to why this agreement was greeted with so much enthusiasm for I believe it is burdened with too much uncertainty. But as I always warn: Do not fight markets.

Look for resistance levels that provide the least amount of risk and trade from that vantage point. Markets are also making a big deal out of the fact that Greece agreed to the summit demands and was rewarded with a 1 percent cut in its borrowing costs from the EFSF. Wow, from 6 percent down to 5 percent. Ireland came away empty-handed as President Sarkozy demanded that Ireland raise it corporate tax rate to European levels, thus creating TAX HARMONIZATION.

France has been angry with the Irish for 12 years as the CELTIC TIGER used a 12 percent corporate tax rate to attract a great many multinational corporations looking for a foothold in the EURO ZONE. Sarkozy was trying to get the Irish to raise the level by promising relief of the EFSF but ENDA KENNY, the new prime minister, said absolutely not. The Irish are fully aware that any bailout will benefit German and French banks so they still feel they have leverage to get some movement on a better bailout deal. The closer the time to German elections, the stronger the Irish hand. It seems that Mr.Sarkozy is like DICKIE in the Fighter: Trying to punch way above his weight.

The final piece of weekend news is the conflicts in the MIDEAST. Qaddafi has rallied his forces and pushed the “rebels” out of previously held positions. NATO has been cautious about enforcing a no-fly zone and really seems to want to avoid battle with any Arab nation. In Bahrain, the situation has turned more volatile as the SHIA majority is not backing down and forcing the ruling monarchy into taking a more aggressive stance. If bloodshed erupts in Bahrain, the Saudis will not be able to watch from the sidelines and that is where the conflict takes on a new dimension.

Tonight, the crude oil market is lower sending a message that the situation is contained but interestingly the GOLD has moved higher in early trading, sending a very mixed message. This situation needs watching for Saudi Arabia is a whole different problem than either Egypt or Libya. To quote Frank Costanza, “SERENITY NOW, SERENITY NOW.”

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5 Responses to “Notes From Underground: MAN PLANS AND GOD LAUGHS”

  1. Michael Greenberg Says:

    Man Plans and G-d Laughs rhymes in Yiddish:

    Mentsch tracht Undt Gott lacht.

  2. Arthur Says:

    Really interested about Bahrain. Regionally, Saudi Arabia’s stability is at risk if the Shia opposition succeeds in toppling the Al Khalifa regime.

  3. Arthur Says:

    “We’re recognized as a place of excellence in global macro.” Nagi Kawkabani, Co-CEO Brevan Howard AM


  4. Gregg s Says:

    Yra hoping that Toby is ok? My thoughts are with you and Janice

  5. yra Says:

    thanks–Toby is fine and at school –thanks for the thought

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