Notes From Underground

All these years of the high level meetings at the World Economic Forum in Davos and what do we have to show for its efforts? At the INSIDERS BALL, where the elites exchange views and pay up to $500,000 for the privilege to listen to ideas that are to move the global capitalist system forward. If the results of the last decade are the aggregation of the best ideas that the “best and brightest” are capable of, then it is time to end the charade of Davos and send the global elite home in tears before they can cause any further damage? The DAVOS crowd has fared well as the global economy has suffered creating a huge question mark over the policy output that is the result of the global hierarchy gathered in the scenic environs of Switzerland. This view is not new as the economist Adam Smith warned long ago:

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meeting, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less render them necessary.” (Smith, The Wealth of Nations)

So to help stop the rot at the top of the capitalist system, where lawmakers and financial giants exchange business cards if not ideas, PEPPER SPRAY IS THE ANSWER.

***Main newspaper story of the weekend is from BARRON’S. In an interview with Van Hoisington, the BOND INVESTOR maintains that the best place to be invested for the next year is the long end of the U.S. Treasury curve. Mr. Hoisington has been riding the 30-year BOND BULL and feels there is no need to change as he is an ardent believer in the ROGOFF/REINHART scenario of the length of time it takes to recover from the ravages of a DEBT CRISIS. Many of the best global macro traders have gotten the BOND MARKET very wrong during the last 18 months as the standard view has been that the BOND VIGILANTES would upend the FED‘s QE programs.

The vigilantes failed to take into account the huge amount of leverage that the global economy needed to unwind. Those who have shorted the long end of the U.S. Treasury market have suffered serious losses and the present technical picture does not provide any salvation for the BOND BEARS. Hoisington believes that the global economy will continue its deleveraging which will stifle economic growth in 2012 with Europe especially being a major drag. Van Hoisington also the believes the FED should restrain itself from any further QE as its impact has been a negative on the BOND market.He believes that FISCAL STIMULUS is a much better way to provide the backdrop for growth and cites the work of Christine Romer and Martin Feldstein.

In a summation of this view he says: “Mr. Bernanke should tell Congress what the University of Chicago Professor John Cochrane said he should: That there’s nothing more they [the FED] can do.” Mr. Hoisington may have it right in the immediate picture but he fails to believe that Ben Bernanke is an ardent 1937er and believes the FED is all-powerful in preventing a redo of the mistakes attributed to the fiscal and monetary policies of that year.

In a tribute to Milton Friedman and Anna Schwartz on November 8, 2002, Mr. Bernanke promised the father of modern monetary theory that the FED would not repeat the mistakes of the 1930s again. There is no chance that the FED will throw up its hands and turn responsibility for an economic recovery solely to Congress and the executive branch for the FED is now in so deep that there is no retreat. Especially as the European bankers are trying to redo the mistakes made by the French in the 1930s. Bonds may be the place to hide and the 30-year bond may well trade down to a 2% yield but it will be like drinking castor oil. I will hold my nose any time the long side beckons.

The technical picture is positive but for me that is just a confirmation not to be short.The yield curve may be the safer place to play for if Van Hoisington is correct any trade in the flatteners should yield sizeable rewards.

***The 2/10 yield curve in the European markets have gone powerfully positive as the effects of the ECB‘s LTRO program is beginning to be felt. Draghi announced the ECB was extending its 1% refi program to 36 months. By extending this an extra 12 months the European banks have been aggressive buyer of the shorter term SOVEREIGNS, hence the very successful two/three Spanish auction last week. The ECB is providing European Banks with a money-making opportunity similar to the way the FED can stuff U.S. banks with earnings when it moves to steepen the yield curve.

The ITALIAN 2/10 has steepened from an inverted rate to being a 134 BASIS POINTS POSITIVE and this was done in a very short time. The IRISH 2/10 has also gone from inverted to positive as it now is out to almost a 100 BASIS POINTS. The PORTUGESE CURVE, WHILE STILL INVERTED, HAS RALLIED ALMOST 400 basis points to be only a -50 basis points.

The LTRO program initiated at the previous ECB meeting may well buy the European banks some near-term relief as the ECB has finally figured out how to create liquidity for the banking sector. If this program is truly a liquidity creator it should reflect in the EURO weakening and the precious metals holding some where in this area. The GOLD/EURO cross should become very important on a big picture view of the ECB success. If the LTRO is monetary NITRO then the GOLD should rally, especially against the EURO.

Tags: Adam Smith, Barron's, bond bears, bond market, bond vigilantes, Davos, debt crisis, ECB, Fed, gold/euro, LTRO, QE, Van Hoisington, Wealth of Nations, World Economic Forum

This entry was posted on December 18, 2011 at 7:16 pm and is filed under Debt Market, ECB, Europe. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.