Notes From Underground: Santelli Exchange — The Fed’s Models Are Broken

Yra/Rick on CNBC, February 1, 2016Watch me and Rick discuss why gold isn’t a hedge against inflation,

but against central banks losing control “of the whole game.”

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13 Responses to “Notes From Underground: Santelli Exchange — The Fed’s Models Are Broken”

  1. Frank C. Says:

    The question is will China’s let the Yuan spiral down without any attempt to defend the currency? If China elects to defend the currency so that it has a controlled decline it will have to sell its large stack of US Treasuries.

    Saudi Arabia also has a large pile of US Treasuries. And has been a seller due to large budget deficits.

    If China and Saudi’s are both sellers that would have a tendency to lower bond prices and raise yields/interest rates.

    Yes the world would move to US Treasuries as a safe haven. But the unknown is how much China and Saudi would sell their bonds into the rally.

    Conversely it would behoove China not to sell bonds until prices increased based on lower yields, however if the exchange rate depreciates by 25% they would be better off unloading as many bonds as possible before the Yuan decline.

    I agree that gold is not just an inflationary hedge but a store of value.
    But would China sell its gold in lieu of bonds as gold rose?

    Isn’t the easiest trade just to short the S&P further out of the money ala Nassim Taleb. If the Yuan crash brings upon deflation the computer algorithms will be at it every day driving the S&P back to the 2009 levels or below.

    As for the BEST an alternative might be a new band called DEBTS

    Drunkenmiller .

    They could do a cover of Jackson Browne’s ” Before the Deluge”

    “Some of them were dreamers
    And some of them were fools
    Who were making plans and thinking of the future
    With the energy of the innocent
    They were gathering the tools
    They would need to make their journey back to nature
    While the sand slipped through the opening
    And their hands reached for the golden ring
    With their hearts they turned to each other’s heart for refuge
    In the troubled years that came before the deluge.”

    • yra Says:

      Frank–best acronym ever —nice .Yes,the play will be the spoos as you so rightly note at the first sign of a global deflationary spiral but the rallies will be rough but will make it a dynamic trading environment —the test will be of course as to the duration of rallies as central banks head in to panic mode.As for the PBOC ,they have been buyers of Gold for many moons and I doubt they will be selling gold,maybe securitizing the relic but not selling —they will remember when the benevolent colonials devalued the family silver in an effort to break the Imperial throne—as Chou En Lai purportedly said to Henry Kissinger when asked as to Chou’s view on the significance of the french revolution–“It’s too early to tell”—the world is not always as they would like to believe in the Western media—the securitization of Gold as a way to raise money is not far off and the IMF should have led the way with its useless gold hoard—its always interesting to me that the haters of gold faill to find value in its essence except for bling for their mistresses and boy toys—-haters got to hate but it blinds them so .

      • Alex Says:

        Yeah, they hate it so much yet they have tonnes and tonnes of it. As you’ve argued for years Yra, PUT IT TO WORK.

        Anyway Gordon Brown showed everyone the right way to rid yourself of Gold – sell tonnes of it right at the bottom of a 20 year bear market. Can you imagine the faces of the bankers when they heard what he was going to do? Knowing them they probably told him it was impossible to sell unless they got an extra $50 discount.

        Gordon Brown a lamb skilfully led to the slaughter if ever there was one.

      • yra Says:

        Alex—Gordon Brown,Tony Blair,David Cameron and George Osborne –with these leaders how the hell did Britain ever build an empire–really ,I know the control of the seas but seriously this group is as inept as any in recent history and are truly the four horsemen of the apocalypse—God save the Queen from such luminaries

      • Joe Says:

        Alex, I remember the Bank of England gold sale, right at the rock bottom as you point out. I believe the Brits liquidated their entire holdings? As Yra pointed out, China is a net buyer, as is Russia. Many of the smaller central banks have added to gold reserves since the bottom.

        Yra, those British leaders came along well after the British Empire peaked before WW One. When the Euro-elites of that time went to war they abandoned gold to finance it. That started the decline of the British Empire.

        I always suggest that those who believe there is no limit to using our American armed forces around the globe should understand the effect of moving off sound money to finance our warriors. For an even bigger picture of understanding how empires cycle over a few centuries, a good look at the Roman experience would also help.

  2. the american limey Says:

    I liked your Mr Santelli piece and understood some of it.

    I wonder if another topic under the heading of this post would be about how the FED ( and everyone else’s) “models” are broken. The data points are using runes in a quantum world, ( I suspect deliberately ALA Sir Humphrey theory), and the next administration should be made to address that issue.

    In his book “the leading indicators” Mr Karabell points out the MASSIVE flaws in the economic indicators used in “fed models” and therefore all other “models” ala inputs to algos. How about scrapping this bollocks and taking the PRICES for capital, inputs and outputs as the indicator. An old idea but certainly less prone to Sir Humphrey’s sleight of hand. We live in a hugely monitored world and so using the “broken model” of the guiding indicators will be another embarrassment the next generation will use to ridicule us.

    China plays the long game and has internal problems beyond belief I HOPE they have changed in their approaches to problems. BUT let us not forget the sole metric that matters when it came to Chairman Mao, 76 million dead. A real metric for government central planning, I wonder when someone will bring that indicator up?

    We have the opportunity to get this issue into the political discussion right now, Iowa has shown that the peasants are revolting and we need a Wat Tyler FAST.

    • yra Says:

      Limey–many good points here –the quantum world is beyond my limited maths but your point on Mao is well noted.From the Urals to the cornfields of IOWAY ,the citizens are up in arms about the distancing of the elites from the electors–it is why Europe is coming to an existential crisis and if Jean Claude Juncker has his way he will play the role of ,well probably Cesescue.Potentially ugly times and economics are just a “smidgen” of it for the moment.

      • the american limey Says:

        Hey Yra didn’t mean the quants they are always tilting at windmills and their efforts are transient or absorptive into the market flow. I have NO interest in their math just so long as they provide liquidity for the most part ( yes I get they can all disappear but that’s just life isn’t it, the days of the market maker are pretty much done.)

        As I BEGIN to understand your point of view it becomes apparent to me that it has permanence and I am enjoying working it out with she who must be obeyed. It was a surprise to me to listen to someone from MIT yesterday explaining how the current thinking is that significant social inequity was the cause for the fall of ALL empires. After the baristas had requested we stopped hitting him for being a smart arse we agreed to listen. The concern our group has is that education has ill prepared an entire generation for the new economies, that our workforce have no viable skills in a nanotech, graphene world and the information being used to determine social policies is deliberately flawed ( Sir Humphrey) thus preventing everyone from seeing that if you MESS WITH A NATURAL SYSTEM YOU MAKE IT BRITTLE!!! So you are more than right and luckily the pols are realizing that a few people can make a difference. As a chum of mine keeps saying

        We do not forgive
        We do not forget
        expect us.

        ps the Empire went down hill when the English decided to become socially responsible ( at least that was my gran’s thesis and she lived it).

  3. Chicken Says:

    FED models are disconnected from reality incompetence, or simply corrupt. I’m going with the latter.

  4. the american limey Says:

    Why the BBC prepared me for IOWA.

    • yra Says:

      Limey—i recant my previous statements –maybe there is a way they had the intelligence to craft that empire

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