Notes From Underground: It Would’ve Been Enough

In an effort to state how badly the markets are ignoring risk, we at Notes From Underground warned about being short volatility. As we head into the Passover and Easter holidays there is much on the table that financials fail to appreciate. A global market focused on the pantheon of central bankers it is the my task to remind of the major issues facing the world’s POLITICAL ECONOMY.

  1. The BOJ and the Abe government have gone to great lengths to create a recovery in Japan and with it a modicum of inflation. At this point economic growth in Japan is stalling. With the initiation of the sales tax increase of 3 percent April 1, Japan’s central bank has a great deal at stake. If growth stalls the BOJ will be hard-pressed for even more radical efforts to jump-start the economy through increased bond purchases both of a domestic and foreign nature. The YEN will be under pressure causing stress throughout the global financial system.
  2. What will happen in China as it tries to stem any debt crisis from too much credit being advanced through  the Chinese shadow banking system?
  3. The problems in the Eurasian land mass as President Putin attempts to undermine the sanction regime of the G7 nations
  4. The potential for  a banking crisis in the European system as the mass of debt becomes a larger burden in a low inflation environment. Compounding the problem is that European banks own a vast amount of sovereign debt of Greece, Spain, Italy, Ireland and Spain,resulting in an adverse feedback loop of monstrous proportions; and
  5. The Federal Reserve has adopted a position of primary concern for a high unemployment/low wage environment and is pretending that a zero interest rate policy can provide the solution. The FED is putting its credibility on the line in pursuing a jobs-at-all-cost position for if the self-imposed jobs threshold can be easily forsaken, why should investors believe that the inflation threshold will be followed? Keep an eye on the 2/10 yield curve for any signs of the market’s concern with regards to the credibility of the Yellen Fed. For now, the SPOOS and NASDAQ are the default mechanism for all investors for when in doubt, buy equities. As Jefferies’ David Zeros said on CNBC Monday afternoon, SPOOS ARE FOR LOVERS AND GOLD IS FOR HATERS, which may well be … for now. But being short volatility is for the clinically insane. Just hope I have a ticket on the volatility train since “YOU DON’T NEED NO BAGGAGE, JUST GET ON BOARD.”

Also in the spirit of the holidays:

If the U.S. Treasury had done only TARP … it would’ve been enough
If the Fed had only provided QE1 … it would’ve been enough
If the Fed had only done QE2 … it would’ve been enough
If the Fed had only done Operation Twist … it would’ve been enough
If the Fed had only done QE Infinity … it would’ve been enough
If Mario Draghi had pledged no taboos … it would’ve been enough
If Mario Draghi had pledged to do whatever it takes … it would’ve been enough
If the BOJ had only doubled the money supply … it would’ve been enough
If the BOJ had only bought massive amounts of JGBs … it would’ve been enough
If the Japanese were only buying foreign bonds … it would’ve  been enough
If  all the world’s central banks had lowered interest rates to zero … it would’ve been enough


Wishing all of our readers a happy and healthy Passover and Easter.

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17 Responses to “Notes From Underground: It Would’ve Been Enough”

  1. jonathonbking Says:

    I appreciate the theatrics, but sometimes (right now) its difficult to interpret what you’re attempting to illustrate. Happy Pesach.

  2. Mark Gsrber Says:

    Have a wonderful Passover, Yra.

  3. Shocked to Find Gambling Says:

    Great post Yra

    The FED, ECB, and BOJ mentality remind me of the investment bank CDO craze of early 2000s.

    Hey, if everyone else is doing it (QE, ZIRP,etc.) it must good.

    To me, the Central Bank policies are CDO Cubed…….pump up assets using whatever means necessary. The odds of it ending well seem small to me, and could be a disaster.

    I may be crazy. The rest of the world seems to think these policies will work.

  4. yra Says:

    Jonathon–just lightening the mood but am pointing out to how much stimulus exists in the global system—with more to come but will the aftermath leave us with a bitter taste—thanks for the Pesach Wishes but always trying to lighten the landscape

    • jonathonbking Says:

      Yra – thanks a lot for the clarity. I’m a [young] student in this industry and in this world, and very appreciative of your blog. I didn’t mean in any way to imply negative connotation by using the word “theatrics”. I’ll continue to read every piece!

      • yra Says:

        Jonathon—no problem –I know my sense of humor can make important things confusing–but the serious of this work always reminds me to find a measure of humor ,otherwise couldn’t get out of bed in the morning and have a joyous holiday

  5. joe Says:

    Your “theatrics” help drive the point. All Five of them. Salute to Shocked on “CDO Cubed.” Pumped up indeed.

  6. trianarael Says:

    Dayenu and then some.

  7. Dustin L. Says:

    Yra- Fantastic piece! Enough said.

  8. Alex Says:

    Jon, to put it very simply – There’s a lot that can go wrong, and if so, that will push volatility much higher. Yra suggests that the markets aren’t pricing in the potential risks that well, if at all.

    So either be long vol, or sit on your hands with no positions, waiting for better prices (that is a strategy in itself). The easy money on the long side has already been made, now on the long side it’s going to be either a lot harder to make money, or impossible.

    • jonathonbking Says:

      Thanks Alex – I appreciate it. I should have been long vol a few weeks ago to lock in profits (hedge) rather than choosing now to close long positions with small gains out of fear. This may sound crazy and/or selfish, but I’m really excited to witness my first market crash (sorry everyone!) as a participant. In 2008, I was 17 years old and didn’t really understand what was going on and why. Just trying to limit my “education fees” paid to the market throughout this process. Thanks again

      • Sacred Reich Says:

        Interesting personal point. I felt much of the same in 2007 when sub-prime came to Euroland late-summer of that year. That splendid German word “Schadenfreude” should be an appropriate expression. Back then I could read all the BIS reports but found it dreadful to have not been able to sense the market mood and the real-time course of the very first QE/ZIRP policy actions in Japan around 2000. (Have the effects on what should follow on the BoJ Fukui’s 2006 retrenchment been ever researched??) Same regret on the short-lived debate on deflation risks in Europe in 2003. But as a word of comfort, these are very glaring topics that haut us so much today…and herd and drive us into the future (as Yra, I see, is pointing out). “You remember a single deluge only, but there were many previous ones.” –Plato

    • yra Says:

      Sacred—I have written about “Schadenfreude” a great deal over the years—it is one of my favorite descriptive words and I hope to avoid practicing it.But in your response to the point of the BIS reports,William[Bill} White was alll over the looming crisis and wrote papers on the role of central banks to Lean or Clean—White’s work is really top rate

  9. Chicken Says:

    An ode in the spirit of TBTF bailouts? 🙂

  10. Chicken Says:

    Yra, Have I mentioned lately how much I enjoy your blog, thank you very much for sharing your thoughts with us, it’s really nice of you to do that.

  11. rob syp Says:

    From Futures Magazine:
    Pension funds–85% will go bust within 30 years

    The “pensions timebomb” keeps on ticking and as societies we become less prepared by the day. This one comes from renowned hedge fund manager Bridgewater Associates.

    The study estimates that public pension funds will earn an annual return of 4% or less in coming years due to near zero percent interest rates and financial repression. That, in turn, would cause bankruptcy for 85% of the pension funds within 30 years, the study warns.

    Yra, isn’t there really no way out of this quick sand created by central bankers other then continuing to take your shots in markets with stops and hope 4 the best….

    Happy Holidays!

    • Chicken Says:

      Seems like a good argument for inflation b/c the only way that problem can be resolved is by increased tax receipts. Heck, what are the chances we (they) chose austerity? Considering the less is more approach, wouldn’t austerity be consistent with the new carbon-less green economy? Good thing we began off-shoring employment decades ago!

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