Notes From Underground: From the Santelli Exchange, February 1

Given the dizzying moves in the market during the past couple of days/weeks, I felt that it would be better to link back to my February 1 appearance with Rick Santelli on CNBC.

Yra/Rick on CNBC, February 1, 2016

As I was watching Fed Chair Yellen testify before Congress for the past two days, I saw the shine of the all-knowing Fed Chair fade. Yellen was extremely uncomfortable as she bore the brunt of Congress’s slings and arrows. The anger of Main Street has manifested in victories for Trump and Sanders, which has sent the ineffective “leaders” in Washington searching for culprits to blame. Chair Yellen was tied to the whipping post, especially in the House of Representatives.

The adoration of the Maestro and Bernanke has sunk to levels of the German two-year note. But while the Congress scapegoats Yellen, the markets cast stones at the ENTIRETY OF GLOBAL CENTRAL BANKERS. President Mario Draghi has seen his stature diminish as the ECB has proven to be nothing more than a confidence machine as Draghi had so proudly proclaimed just a month ago. The problem is that all con men wind up being tarred, feathered and run out-of-town. Draghi has been very quiet of late while the EURO has rallied and the present negative rate and QE program of the ECB has failed to provide the stimulus needed to depreciate the currency and support the banks. Equity values in Europe are a barometer of Draghi’s success.

The impact of the Bank of Japan’s recent attempt to stimulate the Japanese financial markets, and hopefully inflation, has failed miserably. It risks the ire of a Japanese electorate being financially repressed by the policies of Abenomics. When Kuroda tried to shock the markets by embarking upon negative nominal rates–when a week before he said the BOJ wouldn’t go negative–Kuroda’s three arrows have failed. THE STOCK MARKET HAS DROPPED MORE THAN 10%. THE YEN, WHICH GOVERNOR KURODA HAD HOPED TO WEAKEN, HAS RALLIED 7% and Japanese BANK STOCKS HAVE BEEN CRUSHED IN VALUE. Kuroda’s surprise has left Japanese and international investors shocked and awed by the dismal failure of the BOJ‘s effort.

In today’s Financial Times there’s an article titled, “Mrs. Watanabe Burns Her Fingers On Japan Post Bank.” The term Mrs. Watanabe is slang for the Japanese retail investors because so many of Japanese investments are controlled by housewives. Since the giant Japan Post IPO, retail investors have lost 34 percent of their initial investment in what was deemed a very conservative stock. The BOJ’s QQE program has pushed pension funds and typical JGB buyers into riskier equity investments as the NIKKEI is approaching 2013-2014 levels. The 200-week moving average in the Nikkei is currently around 14,850, which will be important for investor sentiment. Today it closed at 15,240.

The conservative Japanese saver has been forced out of JGBs  and into risk. This is the trigger for financial repression. More importantly, prior to the advent of ABENOMICS, the average Japanese investor buying a ten year JGB was rewarded with a positive real yield as nominal yields were low but  prices on daily goods was falling. Now with inflation rising to 0.5% and JGB yields at 0.005%, the average saver is seeing negative returns. Bottom line for Kuroda, Yellen and Draghi: The world is growing weary of the wisdom of central bankers. Last week’s Santelli appearance presaged the coming investment climate. Much more to follow.


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17 Responses to “Notes From Underground: From the Santelli Exchange, February 1”

  1. El Contango Says:

    You got it, Yra. Indeed the central bankers are learning a lesson: the market will win. Listened to an interview with Gary Kasparov today and it reminded me that a chess master thinks differently. He was speaking of geo-politics, but I was hearing geo-economics too. It is a game of war. Position, tactics, specific pieces played in place to attack or defend (or feint?). His is a brilliant mind. Mine not so much, but always looking for insights.

    As I’ve tried to explain to my grandsons (sons too old and uninterested): debt trumps equity. Derivatives on debt are like storms.

    Of course, admittedly, I might be wrong. So Peggy Lee me! (for those who don’t know – “let’s break out the booze and have a ball”)

    • yra Says:

      El Contango–i don’t believe you are wrong.I have lectured at many Universities and over the last 25 years have told students to grow up and be bond traders–not the glamour of equity but you will always have a job and debt is the backbone of global capitalism—even my own kids did not heed the wisdom but so it goes.I saw the Kasparov lecture in chicago on Putin–he is a brilliant man with a sharp axe to grind and use–political economy but as for the Russians this blog derives its name from Dostoyevsky and I am going to brush off the chapter from the Brothers Karamazov—The GRAND INQUISITOR— amust read for those wanting to understand our present state of affairs

  2. asherz Says:

    Alan Greenspan was the original Master of the Universe. Every word of his semi-annual appearance in front of Congress was parsed by the talking heads and financial journalists. The oohs and aahs were heard, emanating from the financial canyons.
    The succeeding heads of the Fed, ECB and BOJ all have donned that mantle of omniscience and to some extent there was a modicum of reverence accorded to these all powerful financial rulers. But time has proven their mantles were nothing more than gossamer threads.
    The mighty Goliaths have been severely wounded but they are still in the fight; witness the 200 and 300 point intraday rallies from panicked markets. But a tell tale sign that the wounds may be mortal is the spike in gold and silver prices which until now were not allowed to lift their heads. They are losing control and each parry shows signs of increasing weariness. So has the star Congressional witness in the last 2 days in these cold days of winter.
    I hope Ms.Yellin knows of a good electrician as we may very well see a plethora of market circuit breakers in the months ahead, as her quiver is now down to her last few arrows.

  3. kevinwaspi Says:

    I talked with Mrs. Watanabe just last week. She is pissed! She’s threatening to pull all her yen out of Japan Post and JGBs and double down on Austrian, Belgique, and Italian CoCos.

  4. Frank C. Says:

    The emperors and empress Central bankers have no clothes. And the markets have now called them out. Not only are you right on the models being broken. But you called out lower rates and higher gold presciently weeks ago. Kudos to Yra!!

    The spike in gold is a big tell. Especially given that all other commodities are in the tank. What was your take on today’s move?
    What do you now think resistance is?

    The Nikkei substantial declines in spite of a known manipulated market is scary.

    The efforts of all central bankers to levitate markets is over.

    ZIRP, NIRP and QE are failed models/experiments. The pursuit of these is proven that it does not create a transmission mechanism to higher GDP or higher inflation.

    The Fed/Janet cannot have the dots were they are over the next three years and simultaneously speak of potential negative interest rates.

    I think Ms. Janet and the other central bankers maybe not only be TIED TO THE WHIPPING POST but will soon be humming a different tune THESE DAYS

    “These days I sit on cornerstones
    Count the time in quartertones ’till ten
    My friend
    Please don’t confront me with my failures
    I have not forgotten them ”

    I don’t believe any of these three central bankers will be in control within 12 months and more than likely sooner. Kuroda will be first to go. And then Draghi after the German coup. It appears the Fed job is too big for Ms. Yellen and she may be better suited back in academia doing more research.

  5. Sophocles Sophocleous Says:

    And the s*** will soon hit the fan. My simple mind sees very obvious signs: technicals have weakened, valuations are not cheap, earnings are in decline, the yield curve is flattening, manufacturing is contracting, and margin debt is off its peak and declining. I outline these in my post here:

  6. Rob Syp Says:

    A $50 move in gold and 50 cent move in silver is very cleansing .

  7. Richard H Papp Says:

    At the end of June, 2015, “for no apparent reason”, a traditional Dow Theory Bear Market was signaled. Since then, equities have gone down “as they reflect deteriorating business conditions”. Ahead we will get the liquidation phase as Mom and Pop “give up”. These quotes are thanks to Richard Russell and may he R.I.P.
    PFF and HYG are gone. The spread between TLT and LQD keeps widening, the latter no longer being a cash machine. Can MUB be far behind?
    In an equity bear market the Rolling Stones sing to me “Time is on Your Side”.

  8. Richard H Papp Says:

    Exactly-“It is the evening of the day”

  9. Dan DeRose Jr Says:

    Yra, Your prose on central bankers reminds me of Hoover’s memoir which is a great read for those interested in a similar economic time. I think the clarity of his thought is lacking in the mainstream today as most are blinded by the brilliance of the alleged scientists running the show.

    – Your Highlight on page 29-29 | Added on Monday, April 6, 2015 10:04:13 AM

    Control of interest rates could not stop them. When the public becomes mad with greed and is rubbing the Aladdin’s lamp of sudden fortune, no little matter of interest rates is effective.

    – Your Highlight on page 34-34 | Added on Monday, April 6, 2015 10:11:49 AM

    Experience had amply demonstrated that decreased rates and open-market operations could stimulate speculation in good times; but we were soon to prove that they could not activate business in bad times. Thus these activities proved incapable of either checking booms or checking depression. And the system stimulated a false sense of security which in itself led to excesses.

  10. Chicken Says:

    Wonder when the next market moving central bank intervention is most likely to occur?

    • Chicken Says:

      In the spirit of necessity being the mother of intervention of course.

    • yra Says:

      Chicken—look to Europe—Draghi ‘s ego is wounded in love so he will be dangerous

      • Chicken Says:

        Another self-anointed genius, today Hawker claims “economic fundamentals are sound, and our financial system is in good shape.” then further persuades us of his astounding comprehension by saying “China is not our major trading partner”.

      • yra Says:

        Hawker—must be an antonym

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