Notes From Underground: Friday and the BINI SMAGHI Rally Continued

It was a risk-on day Friday as the markets were ostensibly relieved by the exit of Berlusconi in Italy and Papandreou in Greece. The replacement of two European will have little effect on the austerity proposals facing the beleaguered profligate states. Most important for the EU is whether the EUROS will be “FOUND” to backstop the indebted sovereigns so as to be able to aid European banks loaded with “risk-free” sovereign bonds. There are meetings all over the world to find support for a world-wide bailout of Europe as the G-20 meeting revealed the urgency of the situation.

As the world economy is in a very fragile state a collapse of the European financial system would send tremors throughout the world. It seems that no agreement was reached at CANNES but everybody departed thinking that action must be taken. The Obama administration is adamant that Europe step up its own TARP program, and, if necessary, would acquiesce to a large role for the IMF.

In the weekend press stories IMF MANAGING DIRECTOR CHRISTINE LAGARDE was in China, Russia and Japan pushing support for an EU rescue package. Very little was reported from Russia and China, but Lagarde made some interesting comments while in Japan:

1. “Japan’s recent currency intervention aimed at curbing excess volatility was in line with the spirit of G-7 and G-20.”

2. “We take the view the concerted action is the most efficient way of intervening.”

3. Lagarde also commented on Japan’s increased loans to the IMF and was asked if she had requested more Japanese involvement: “If I had, I wouldn’t tell you because it would be for him to say so and current resources at the IMF are adequate at the moment.”
These statements from Lagarde lead me to believe that Japan has gotten the okay to intervene to weaken the YEN. When it will occur I don’t know but it seems that the Japanese will support the IMF in Europe with global support to weaken its YEN. The first LAGARDE quote is an outright fabrication for the only volatility in the YEN during the last four months has come from the BOJ and MOF intervening in the market. If the BOJ had not intervened, the YEN would have been very range-bound trading in a three-YEN range and volatility pricing would have continued to collapse. The pretext for JAPANESE intervention based on “excess volatility” is a sham.
Japan has intervened because it’s concerned that an overvalued YEN is placing huge pressures upon its export sector. Again, I advise paying close attention to what I refer to as the LEXUS-MERCEDES barometer. As the YEN becomes overvalued to the EURO, the ability of German and other European carmakers to take market share increases. The 35% appreciation of the YEN against the EURO during the last three years has taken a toll on the Japanese auto manufacturers.
The question for the markets is: Where does the buying of YEN originate from after the recent intervention, October 31, the BOF/MOF intervened to create a four-handle range in the YEN (75.70-79.50) and, as of Friday’s close, the YEN was back at 77.25 YEN TO THE DOLLAR. It seems that the only buyers of YEN have to be Japanese investors and pension funds using the intervention to repatriate YEN from around the world;if that is so then the Japanese government should move to tax Japanese investors desiring to bring YEN home during these chaotic times,for it is undermining its policy.
Further, in response to Lagarde comments, will the IMF coordinate some type of intervention to help the Japanese to weaken the YEN while Japan agrees to increase its loans to the IMF? From all the discussions and globetrotting, some IMF-orchestrated plan is in the works. The world has been apprised of the dangers of a collapse of the EUROPEAN financial system, as traders and investors we need to be vigilant.
***As an aside, after Wednesday’s collapse in the BUND/BTP futures spread, the DEC/DEC contracts gained back all of its losses and then some by Friday’s close. This certainly aided the RISK-ON rally and the media will yell that it is all about Berlusconi. NOTES FROM UNDERGROUND will never buy that analysis but remain aware that the bigger problem is and will be Spain. Yes, Italy has its problems but Spain, with an austerity budget and 22% unemployment, is a far greater concern.
Next Sunday is Spanish elections and the polls overwhelmingly show that the Socialists are going to lose, thus bring a more conservative government back to power. The Spanish people are not enthralled with more austerity and will create uncertainty as to what type of policies the new government aspires. Remember, Spain has no BOND FUTURES to trade so any concern about Spain’s intentions will find itself in the Italian BOND FUTURES (BTP).
*** Last week there was an interview with Jin Liqun, the Chairman of the CHINESE SOVEREIGN WEALTH FUND, about China’s purchasing European sovereign debt. In the Al Jazeera interview Jin Liqun raises the issue of problems with the EU stem from its antiquated welfare state system. “If you look at the troubles which happened in European countries, this is purely¬† because of the accumulated troubles of the worn out welfare society. I think the labour laws are outdated. The labor laws induce sloth and indolence, rather than hardworking. The incentive system is totally out of whack.”
If these comments represent the thinking of the Chinese policymakers, then Europe should not be expecting any UNILATERAL support from the Chinese. Mr. JIN‘s words would fit in the dialogue of any TEA PARTY ideologue or some German anti-bailout official. Good Luck, Lagarde!

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9 Responses to “Notes From Underground: Friday and the BINI SMAGHI Rally Continued”

  1. arthur Says:

    again, great macro thinking.

  2. usikpa Says:


    EFSF is dead on arrival. No BRIC sovereign wants to use this scheme, rather comit funds via the IMF (Lagard admitted it audibly in Moscow).

    The role of the IMF, by its status, to temporarily bridge balance of payments gaps. The problems of Europe are internal debt crises, not balance of payments gaps (yet).

    Sorry if I missed that but just how do you see IMF possible involvement? Lending to Greece/Italy/Spain directly while taking oversight of economic programs in these countries? What will Germans do?

  3. yra Says:

    usikpa—many argue that the problems with the piigs is a balance of payment problem as the entire structure of the EURO has rendered some nations unable to control their currencies and economis but under the umbrella of the ECB and EU about to borrow at cheap rates to fund the deficits –until now.The IMF under European leadership will provide the support–yes,maybe questionable under its mandate but the rules are flexible and if the world agrees that Europe is a global systemic problem a way will be found.In 2008/2009 the IMF ramped up its SDR fund by a large amount thus creating a vast pool of liquidity.The BRICs appear ready to utilize the IMF as it is the world’s money rather then just theirs on a unilateral basis.The Germans are already under a great deal of pressure as they are deemed to be a problem similar to the Chinese—export oriented and lacking domestic demand.The U.S. will not object,maybe Congress,but the Geithner team will look to be all in with the IMF to stem the systemic risk of an European implosion–at least until December,2012.

  4. yra Says:

    usikpa—also be aware that all rules are meant to be broken.Remember that Ms Lagarde is a lawyer from Baker-Mackenzie in Chicago and lawyers are always skirting the law and finding the loopholes as needed–that is why the movers and shakers meet in DAVOS–so they can study the ways to obfuscate and insure they are not held to any restrictions—LAWS WE DON”T NEED NO STINKIN LAWS—-see hank Paulson and the original TARP proposal

  5. usikpa Says:


    Thank you for the reply.

    Still appears IMF is SO ill-poisitioned to lend US-guaranteed (right?)Euros to Euro-capital rich Europe (because of trade consequences further down the line), while Germany just watches from aside …

  6. JediTrader Says:

    Good post! What website could i use to access current market pricing for CDS? I haven’t found a good source yet and am not sure if this can only be done with a trading platform/software that has access to this information. Thanks!

  7. yra Says:

    Jedi–i use the bloomberg on the floor.They have a great page but maybe someone can help you and post a source that you can avail.

  8. usikpa Says:

    Jedi, try or!FRAGER10:IND

    These are obviously delayed in time but … free for everyone with internet access

  9. JediTrader Says:

    Awesome….thanks! And Yra let me know if you ever need some help down there!

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