Notes From Underground: George Soros In the Time of Draghi

The financial world is awash in opinion on the overvaluation of the EURO. Even ECB President Mario Draghi has hinted that he is concerned about the deflationary impact of an overly strong European currency. It makes one think: George Soros solidified his position as the master of investment by breaking the Bank of England’s effort to hold the British pound at a pegged level that the market had determined was absurdly high. The PEG level was to be defended even it if meant bringing the U.K. into a very painful recession. The BOE even went so far as to raise overnight interest rates to 15 percent in an effort to raise the cost to speculators betting against the POUND. Rates were being raised even as the U.K. economy was in the midst of a slowdown. In a day known as Black Tuesday, the BOE and the Exchequer capitulated to market forces, in which George Soros held the largest position, and Britain stopped defending the indefensible. In two years time, the U.K. was in recovery mode with a devalued POUND and lower interest rates, while the remaining European nations tied to the Deutschmark peg were struggling to find economic growth.

While I’m not a fan of Mr.Soros, I noted in the book, “Inside The House of Money” that the U.K. ought to have placed a statue of Soros in Trafalgar Square. The markets forced a policy change in England that the policy makers were too fearful of undertaking because of the politics involved. If the EURO currency is overvalued and causing problems for ECB policy makers where are the speculative forces to deliver the desired result President Draghi is pushing. EURO short sellers have lost so much money during the last two years it leaves one to wonder what market forces are maintaining the strength of the euro. Questions of troubled banks, unemployment levels of 12 percent across the entire continent, Cyprus expropriating bank depositors with the EU finance chief calling it a template for future “bail-ins” and then throw in the Ukraine for geopolitical instability and the euro is still 138.50. HMMMMMMMMMMMM, is this a statement about the Dollar more than the euro? That is the fundamentalist conundrum.

***Tuesday brings an interest rate announcement from the Bank of Japan. The markets are expecting the BOJ to maintain its present policy of continued bond buying but does not expect any new drastic action until the BOJ has more time to measure the economic impact of the sales tax increase that went into effect April 1. Last night the retail sales figures for March were released and they showed robust growth, but that is a classic outcome of “intertemporal dislocation” as demand was brought forward before a price increase took place. This meeting is the second one in April as the last BOJ rate decision was April 8. The only problem with the consensus view of NO CHANGE in policy is that the YEN is stronger and the NIKKEI equity index weaker since the last meeting. The Japanese financial system could use a boost from its concern about ABENOMICS failing and it seems that the Abe government and BOJ are far too committed to creating inflation to stop BOJ action now. Check the YEN resistance levels as far more will be gained from a surprise–being short YEN–than if the status quo is maintained and being long YEN. But this is certainly a difficult  terrain for all currency traders.

***Is globalization under threat? The effort by GE to acquire parts of the French conglomerate Alstom have been met by an alternative effort from the German conglomerate Siemens. The German company is trying to secure the energy parts of Alstom while transferring Siemens’s high-speed train division to Alstom in an effort to build European champions and politically protect jobs in Europe. The effort to save jobs in France and Germany’s role in securing a European single bank mechanism to backstop troubled banks gives Siemens home field advantage–it is their balls,bats and they hired the umpires. But building national champions in lieu of sound finance is a problem for the spread of the benefits of globalization. Blocking a transaction based on domestic political issues is always a problem. And, the U.S., Canada, Britain, France, China and others are all guilty of invoking “national interest” to encumber financial benefits. Now, about the rise of sanctions.


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12 Responses to “Notes From Underground: George Soros In the Time of Draghi”

  1. CHT Says:

    Yra – Mark Dow has highlighted best that the fundamental macro guys are misunderstanding the key driver of the Euro. Essentially, Euro is bid because the banks are repatriating offshore assets to sure-up their balance sheets, invariably creating a consistent inward flow.
    With this view in mind, I hypothesised that perhaps the end of the Euro bank stress tests this year would punctuate the end of these flows, time shall tell.
    We know that the real macro fundamentals are as mapped out by JA, which arguably will be the long term anchor, albeit in the meantime this idiosyncrasy is one to be mindful of.

    Brilliant piece mate!

  2. GreenAB Says:

    with China still looking weak and the US far into the cycle – Europe looks to be in the sweet spot for capital flows. the recovery (if it can take hold) has way to go and assets are cheap (on a relative basis).

  3. yra Says:

    Green AB—I agree with the “sweet spot”–especially as European debt seems to be packaged as a tranche with the bund and french oats as the anchors and then you raise the yield by bundling in the peripheral debt—but if all is well Draghi and Noyer should just be happy that the market has accepted European solvency and let the currency rise—can’t have it all ways without impacting your policy.Because the ECB has a single mandate,inflation,this is the problem

  4. yra Says:

    CHT–the view from downunder is spot on—repatriation and the build of balance sheets to meet AQR–could be a troublesome combo in the short term

  5. GreenAB Says:

    CHT: could you explain or link to an article regarding the repatriation of offshore assets?

    are you talking about assets held off balance sheet? or are you talking about non EURO demoninated assets that are already on the balance sheet? if it´s the latter then i don´t quite get the point. are there any limits, how banks balance sheets ought to be constructed currency wise in order to make the stress test?

    thanks for clarifying!

  6. Shocked to Find Gambling Says:

    Yra- To me, the Euro is a junk currency. It is based on a monetary union, but not one country…..wait until the next recession and we’ll really see how the interests are divided. IMO, the Euro could vaporize, if a serious recession hits.

    When Spanish Sovereign debt trades thru U.S. Treasuries, something is not right.

    I believe the Euro will weaken dramatically when the world economy starts to weaken, or maybe just before that.

  7. kevinwaspi Says:

    Interesting recount of “Lord Soros” and the BOE. Will his next breaking of the bank come to roost further east, in Russia? Last week’s 50bp hike in the reference rate to 7.50%, the (briefly delayed) continued pounding of the rubble (sorry, “ruble”) and the slowing of growth in the former USSR may have some familiarity.

  8. Chicken Says:

    If faith in the $US is waning, then shouldn’t precious metals and commodities in general, be in an uptrend?

  9. arthur Says:

    great points Yra. Interview with Doug Kass: Preparing for the Bear’s Return, Barrons

  10. yra Says:

    Chicken—the problem for the precious metals at this point in time–in my humble opinion—is that the equity markets have been deemed a safe haven because with little inflation may as well invest in equity markets and buy stocks which have upside potential and pay a dividend and may also be somewhat of a hedge against inflation–as insane as an investment profile that it may be —the charts will have confirmed otherwise—but just remember keynes—markets can remain irrational far longer then you and I can remain solvent

  11. yra Says:

    arthur–thanks and I have read the Kass piece–but thanks for providing the link

  12. Notes From Underground: Looking Back Two Weeks and Two Years | Notes From Underground Says:

    […] April 28, 2014: George Soros In the Time of Draghi […]

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