Notes From Underground: The Markets Are Wrong (Or Draghi Lets Us Know Who Is In Charge)

Following up last night’s post, Arthur left a note on the blog linking an article from Bloomberg Businessweek, written by Brendan Greeley. The language of the article is crystal clear and provides another example of a Euro policy maker claiming far more insight than the collective wisdom of Mr. Market. “Investors ,he told the Bundestag, are ‘charging interest rates to countries they perceived to be the most vulnerable that [go] beyond levels warranted by economic fundamentals and justified risk premia. This fear is “unfounded. The market is wrong.'”

Since the onset of the European sovereign debt crisis, markets have been told they were wrong. As Greek interest rates soared, the 2-year note soared above 100%, the markets were wrong. The Chinese Sovereign Wealth Funds promised the eurocrats that they would purchase billions worth of sovereign bonds only to renege upon further review. Let us give President Draghi some latitude and allow his economic analysis about mispriced bond prices to be unchallenged. The problem then becomes political risk and for that Mr. Draghi has no model to assess that risk premia.

The problem for Mario Draghi is that even in an interest rate-starved financial world, Spanish bonds have a problem even upon offering a yield of 5.7%. Even the Brits get away with a 1.8% 10-year GILT. For Mr. Draghi the Keynes aphorism stands: Markets can remain irrational much longer than you can remain solvent.

***Quick hitter: Many markets are testing their 200-day moving averages. I look at the 200 days as a good measure of mean reversion and are most important in my trading on a weekly closed basis. As the markets correct, the 200-day provides a perspective on price. I do not claim to be a sophisticated technician but I like the idea of mean reversion to tell me when a market is highly overextended either on the short or long side. So I advise traders to be aware and do some work as to attaining a technical picture on the pricing of all the markets we discuss. The following markets are testing their 200 days:

1. The Nasdaq 100;
2. The Aussie Dollar;
3. The Gold/Silver ratio;
4. The Aud/Cad;
5. The Cad/Swiss;
6. Nikkei Index
There are many others but i just want to remind market participants to be aware of where we are coming into the final two months of the year. This week we have had the YEN and U.S. 10-year notes struggling to hold the 200-day m.a. and then get some nice follow through moves upon the violation of the moving average.
***There is a Reuters story that we have reported on for the last 18 months: “Brazil admits to a Now Dirty Float.” It was a policy of Brazilian President Dimla Rousseff to weaken the REAL so as to help jumpstart the struggling Brazilian manufacturing sector. The issue of an overly strong currency forced the Brazilians to enact some restrictions on the inflows of foreign money and to also bring down interest rates by lowering the overnight rate by 5% during the last year. The hot money flows have slowed as the currency weakened especially as Brazil’s real interest rate went from a strong 6% to probably just above breakeven.
The slowdown in global commodities have also weakened the REAL but the policies of this present government have done far more–just look at the continuing strength of the Aussie as a comparative analysis. The Aussie is higher on the year while the REAL is about 6.5% weaker–both heavily traded as commodity based assets with far different results. As Brazilian Finance Minister warns, “our system is a dirty float like everyone’s. For us the ideal is a floating currency, without manipulation …. But if the whole world is going to manipulate their exchange rates, we will too.” The policy of QE by the developed countries has far greater ramifications than the theoretical mathematical models reveal.
***A heads up for all traders. There is a very powerful trading algorithm at work and it is based on keyword headline releases. My friend (hat tip JA) pointed out that various trading programs are being developed that react to headlines and set trading in motion. This afternoon was a case in point. The new Governor of the Reserve Bank of New Zealand, Graeme Wheeler, gave a speech at 3:00 p.m. CST and as the speech was released the headline story was, “RBNZ’s Wheeler says bank has scope to cut rates if needed.” Upon reading the body of the speech the headline was far from accurate but it didn’t matter for the KIWI had dropped 50 bips from its price a minute earlier. The Aussie/Kiwi cross also rallied from 1.2605 to 1.2660. The power of these algos is evident and I am just alerting my readers to the effects of such programs. Good traders and investors always few markets through a dynamic lens, so as usual we will adjust and utilize the newest market tool to our advantage.

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3 Responses to “Notes From Underground: The Markets Are Wrong (Or Draghi Lets Us Know Who Is In Charge)”

  1. I'm Not Here Says:

    News Flash…

    Gold/Silver In Short Supply: Central Banks’ PM Vaults Found Empty

  2. Peter Nothling Says:

    Hi Yra, Somebody has been reading your website!!!

    Jim Sinclair’s Commentary

    At last, a good initiative by the Gold Counsel, the mouth piece of the major producers.

    Invitation to a World Gold Council policy roundtable – “A more effective Eurozone monetary policy tool – gold-backed sovereign debt


    The World Gold Council and Monetary Expert Panellist, Professor Ansgar Belke invite you to attend a policy roundtable on

    “A more effective Eurozone monetary policy tool – gold-backed sovereign debt”


    Daniel Gros, Director, Centre for European Policy Studies

    Confirmed speakers:

    Prof. Dr. Ansgar Belke, Monetary Expert Panellist for the Economic and Monetary Affairs Committee, European Parliament and Jean Monnet Professor at the University of Duisburg-Essen

    Prof. Dr. René Smits, Professor of the Law of Economic and Monetary Union at the University of Amsterdam

    Date: 6 November 2012
    Time: 12.00 – 14.00 – Lunch will be provided
    Location: Cicero Brussels, Rue de la Science 14

    Monetary Expert Panellist for the Economic and Monetary Affairs Committee, European Parliament and Jean Monnet Professor at the University of Duisburg-Essen, Dr. Ansgar Belke will present his report commissioned by the World Gold Council which provides a platform to debate the use of gold as collateral for highly distressed bonds and the benefits this would bring in terms of reduced financing costs in the Eurozone without the associated shortcomings of the other non-conventional monetary policy tools that have been used to date.

    Professor Dr. René Smits, Professor of the Law of Economic and Monetary Union at the University of Amsterdam will provide legal insight into the debate.

    The event will bring together senior policymakers and journalists to discuss the role that gold-backed bonds can play in bringing about a more effective Eurozone monetary policy.

    We hope that you will be able to join us for what we know will be a stimulating discussion amongst senior policymakers, academics, and media representatives.

    To register for this free event please RSVP to

  3. yra harris Says:

    Thanks for the update Peter–just a little man sitting in the midwest and studing the world for 42 years and trying to make sense out of the twists and turns that take place.thank you for covering my back and providing me with news that I miss and for the compliment–so eay to see some of these things that I am amazed that the big thinkers miss it

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