Notes From Underground: The Tight Rope Walker Was The Key Circus Performer

As I covered in NOTES yesterday, the three-ring circus was coming to town Thursday and the show was so fantastic that it dazzled investors worldwide. The RIKSBANK began the show by cutting its rate by 25 basis points to get the audience in a festive mood. Mervyn the Magnificent from the Bank of England did his laying down and going limp act so as not to be sawed in half by the by those magicians of the slight of hand. The BOE left everything as is and presented a very benign statement that offered up very little as to its rationale for maintaining the present rates as well as the same ASSET BUYING PROGRAM. The market was gawking at the rising financials in Europe when in the center ring, Marvelous Mario dropped his cape and headed out on the high wire in which the safety net was pretended to be removed or was totally transparent.

At first, Mario failed to impress the crowd as it was revealed that there was to be NO CUT IN RATES. As the crowd gathered and watched the tight rope walker traveling further from the platform, the crowd cheered as Mario proved he was capable of balancing himself on the thinnest of margins and provide the flexibility to make everyone in the audience happy–BRAVO, BRAVO, BRAVO. So what in fact was actually done by the monetary guardians of the EU?

A new acronym was presented, OMT (Outright Monetary Transaction), which is replacing the SMP (Security Market Program). The workings of the new OMT seem very similar to the old SMP machinery but hey, always need a new and improved product. In the final analysis though, it appears to be another LTRO (Long-Term Refinancing Operation) as the ECB has the authority to purchase sovereign debt of up to a three-year duration and the amount appears to be unlimited although Draghi promises all purchases will be sterilized. We just will not know when and how much so the STERILIZATION concept leaves the markets dazed and confused as to its real effect. The OMT program being unlimited gives the ECB the ability to put the markets on edge and keep the speculators from attacking the efforts of the CENTRAL BANK to effect monetary policy in the short end of the market.

The impact of FISCAL AUSTERITY can only be offset by huge injections of liquidity and Mario Draghi wants to prevent a redo of the July 25 market action when SPANISH AND ITALIAN YIELDS TOUCHED 7%, DRAMATICALLY FLATTENING THE CURVES AND THREATENING THE SEIZING UP OF THE EUROPEAN PERIPHERAL DEBT MARKETS. Because the OMT has no limits and is totally at the discretion of Mario Draghi’s ECB executive board, this is LTRO IN MOTION. There is an element of CONDITIONALITY, which placate the BUNDESBANK as the ECB can cancel the buying of any nation’s sovereign debt that fails to live up to the conditions that the stressed sovereign agreed to–think the AUSTERITY BUDGETS OF GREECE AND IRELAND, et al. If the ECB deems the nations to be in noncompliance with agreed upon terms, then the BOND BUYING STOPS AND THE MARKETS WILL HAVE THEIR WAY AND DRIVE RATES HIGHER. Thus, Draghi has something for everyone. The true tightrope walker, “flanked by life and the funeral pyre.”

The new program gets even more complicated as there is an “enhanced conditions credit line” (ECCL), which has not completely been clarified as of yet but some analysts suggest that this is where the IMF is going to become an active participant in the Draghi Plan. The ECB will let the IMF play the bad cop role and lay down tough conditions that the nation in need will have to adhere to and become the major enforcer. Not totally clear as to the minutiae as it still needs to be looked at further. Also, the ECB eased the restrictions on credit ratings for government and guaranteed debt, basically allowing the use of lower grades of collateral. My respect of Mario Draghi grows and as we can be certain. He is “NO JEAN CLAUDE TRICHET.”

Mario Draghi is certainly in a tough spot but his respect for the power of financial markets seems to provide him with the agility to buy some time. He said in his press conference that much of what is desired for the EU is with the authority of the politicians. The final question as to what will be done with the time that Draghi is trying to provide: WILL IT BE A MORE GERMAN EUROPE OR A MORE EUROPEAN GERMANY?

***It’s unemployment Friday in both the U.S. and Canada. Again, I remind my readers that both sets of data are now released at the same time, 7:30 a.m. CST. The Canadian data will be a mere sideshow because of the robustness of the ADP number–201,000–which was way above consensus. The strong ADP number resulted in a sell off of the S&Ps as traders felt that such a strong number would prevent any further FED QE until after the election. The end result was the ECB liquidity and hope for a turn in the U.S. economy provided the thrust to slough off the impact of the QE CROWD.

If the U.S. numbers come in weaker than now expected the S&Ps and risk on trades will be in a quandary–better economic data or more promise of FED action. I think that any break off weak data will result in a late rally as the FED liquidity plan will keep market shorts very nervous. THE ADP CAUSED AN EARLY RALLY, WHICH HAS MADE TOMORROW’S TRADE SO VERY DIFFICULT. Be patient and look for clues in the European debt markets and in the precious metals. A further gold rally on weak data will set in motion the ALL POWER TO THE QE.

  1. U.S. NFP GUESSTIMATE is 135,000, a rate of 8.3% and a 0.1% increase in hourly earnings. Again, focus on the manufacturing sector to see if exports are still adding to economic growth
  2. Canada is expecting 10,000 new jobs and the unemployment rate holding at 7.3%. Again, watch the Canadian manufacturing jobs, especially after the fairly robust auto sales we saw earlier this weak. The auto sector in Ontario is a big jobs provider for auto shipments to the U.S.

***Today the YEN was very weak and most investors will attribute it to the RISK-ON trade providing the reason for the YEN to be relieved of its haven status. What went largely unnoticed in today’s news ladened market was a statement by BOJ Governor Shirakawa that the “STRONG YEN BIG NEGATIVE FOR JAPAN EXPORTS” (Reuters). The YEN is the purview of the Ministry of Finance (MOF) and not the BOJ so it is of more than passing interest that Shirakawa has openly commented on the overly strong YEN. THE MOF HAS BEEN PUSHING FOR A WEAKER YEN AND NOW THE BOJ IS TALKING IT MAY BE TIME FOR THE JAPANESE TO PROVIDE MASSIVE DOSES OF LIQUIDITY TO WEAKEN THE YEN. A BUYING OF EUROPEAN DEBT MAY PROVIDE THE IMPETUS OF SUCH A PLAN–WEAKENING THE YEN AND FINDING A FRIEND IN PRESIDENT DRAGHI.

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4 Responses to “Notes From Underground: The Tight Rope Walker Was The Key Circus Performer”

  1. Danny Says:


    I am not sure if you keep up with Bill Gross’s market views/writings but in his latest Investment Outlook he wrote…

    “Our entire finance-based monetary system – led by banks but typified by insurance companies, investment management firms and hedge funds as well – is based on an acceptable level of carry and the expectation of earning it.”

    He goes on to say that as the potential for carry declines “excessive historical overhead represented by rents, salaries, pension and health benefits, to name just a few, force financial and lending institutions to do one of two things: They lever up to cover those costs or they slow or shut lending down to preserve equity and the ultimate franchise.” And we can say with some degree of certainty that banks aren’t levering up and expanding lending operations.

    If Mr. Gross is on point, I can’t help but wonder if his logic implies that gold is in a strange paradox in which continued/additional unconventional monetary stimulus, coupled with ZIRP, is actually a deflationary paradoxically to the conventional wisdom/thesis that monetary stimulus –>inflation–>BULLISH GOLD! But on the otherhand, I may be stretching a bit too far.

    Can you weigh in on this pondering?


  2. yra Says:

    Danny–this has been a theme of my mine since the beginning of my writing of notes and years on bloomberg and cnbc–the greater the possibility of DEFLATION the higher the GOLD will go because investors know that the U.S. political system cannot and will not tolerate deflation which is why I make reference to Bernanke as the ultimate ’37er and again will not tolerate deflation–remember he views the 8.3% unemployment number as grave and intolerable—imagine him dealing with european type unemployment????

  3. ericharbor Says:

    It looks like Glencore is seeing a bottom, or a cyclical low, in regards to coal. Unless this is a saving face moment, it’s pretty impressive for a conglomerate to buy something at such a deeply discounted price. Maybe it all fits in with what is going on globally – even in a slowdown, countries need assets.

  4. yra harris Says:

    Eric —I saw that Glencore is enhancing the bid with the caveat that Glasenberg will be the sole CEO/Chairman but value wise the bid is not that great and not near waht the Qataris are asking for–but it still invalidates my opinion and I will pay close attention—interesting that it comes as the Aussie reverses and China announces large infrastructure plan

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