Notes From Underground: The Heaviness of Being a Global Macro Trader

There is so much in the political realm that proves the concept of 2+2=5. I will continue the analysis of the impact of politics on markets but remember there is so much political tinder that can ignite the fires of market volatility. A quick sample from over the weekend can be found in Europe where local elections in Frankfurt, the home of the ECB, resulted in large gains for the AfD right-wing party. More dramatically, a small Neo-Nazi party won 17 percent in one district. Support for Merkel’s party, the CDU, and her coalition partner SPD, dwindled. This weekend’s regional elections in three German states will probably result in more losses for the Merkel government. Again, as bad as the refugee problem is in Germany it seems that the monetary policies of the authoritarian ECB and President Draghi are causing greater angst among the German population. Negative interest rates in Germany continue to repress German savers, resulting in a loss of confidence in the established political elite.

The spillover to the BREXIT vote will be realized if the mainstays of the EU project continue to suffer from the disillusionment of their electorate. The Eurocrats’ ability to generate growth is hampered by the Maastricht Treaty and its emphasis on fiscal rules that result in a financial straitjacket to rival the GOLD STANDARD that caused great problems for governments trying to throw off the yoke of the 1930’s global depression. The Germans would never have allowed for the huge expansion of the European Union without the strict Maastricht rules thus setting up the situation for the ECB to be the standard-bearer for combating the entrenched stagnant economy. The struggle for Europe is that the ECB is the irresistible force meeting the Bundesbank, the immovable object.

This collision course is the major problem confronting Merkel and Draghi, which makes this Thursday’s ECB meeting so important. During the past week the ECB BOARD MEMBERS ARE ATTEMPTING TO WALK BACK EXPECTATIONS FOR MORE QE SO AS TO PREVENT A REPEAT OF DECEMBER’S MARKET RESPONSE TO THE STATEMENT. (It was well below market expectations, which led to a selloff of sovereign debt and a 4 percent rally in the EURO currency.) Be careful as Draghi may try to get more done now as the political tail winds are becoming headwinds. From a TECHNICAL perspective the EURO has resistance at the 200-day moving average (CQG–110.47).

***Today, JPMORGAN was quoted in a Bloomberg article by Eshe Nelson titled, “Europe’s Peripheral Bonds Are A Steal.” The bank’s London CIO Nicholas Gartside claims Spanish and Italian spreads can halve in the next 12 months. I presume he means relative to German debt because of the ECB’s QE program. The concept is correct as a trade but I WOULD NOT MAKE THIS INVESTMENT. My logic is simple and should be a concern for your portfolio. The payoff for taking this credit risk is just not worth it. If the BRITS leave and other EU voters push for more referenda, the debt of the peripherals is going to suffer. Add in Merkel’s slipping poll ratings and the risk/reward is not worth it. Revisit the sovereign debt markets from 2011 -2012 to get a qualitative view of the potential fallout after the Bundesbank gaining increased influence over ECB policy.

Yes, JPMORGAN is correct on a relative value play but from a risk/reward analysis I would not go chasing this whale. But the entire premise of this relative value trade is based on the FACT that the world’s central banks have broken the signalling mechanism of the world’s bond markets. Wonder why the GOLD has so out performed in the realm of the Humpty Dumpty central banks. (See my February 1 appearance with Rick Santelli on CNBC.)

***From the G-20 meeting comes the essence of political dissonance. On Friday there was a WSJ article by Takashi Nakamichi titled, “Global Pressure Gives Japan Few Options to Weaken Yen.” It seems that Taro Aso, Japan’s finance minister, misunderstood European concerns over the weakness of the YEN. Mr. Aso informed the Japanese Parliament that Mr. Dijsselbloem was misquoted about Brussels’s concern with the Yen’s value and its depreciation leading to a global currency war. As Mr. Nakamichi  writes in response to Mr. Aso: “A European Council spokesman told the Wall Street Journal earlier Mr. Dijsselbloem’s comments had been reported accurately. Japan’s Ministry of Finance declined to comment later Friday on the content of G-4 discussions.”

It seems that certain parties failed to get the message from the meeting in Shanghai. This finger-pointing against Japan was certainly supported by the Chinese and makes this situation reminiscent of June 1998 when the FED intervened to buy YEN just as President Bill Clinton was heading to Beijing. The Chinese were irritated by recent efforts by Japan to depreciate the YEN during the height of the Asian contagion crisis of 1997-98. The YEN had dropped by almost 30 percent during that twelve-month period causing pain for some Asian economies as the Chinese claimed the Japanese were exporting deflation through a depreciated yen. In an effort to PLACATE the Chinese, Treasury Secretary Robert Rubin reversed the STRONG DOLLAR mantra and ordered the FED to BUY YEN AND SELL DOLLARS. Complicating the politics was the fact that President Clinton did not inform the Japanese and provided a greater slight by not stopping in Tokyo.

The difference of opinion emanating from the G-20 should be of greater concern because of the Japanese moves on Friday. The markets learned that the BOJ’s Governor Kuroda was replacing a voting dissident with a more friendly QE and negative interest rate source, Makatu Sakurai. The BOJ’s recent NIRP vote was a 5-4 vote in favor so Kuroda needed to improve support for the newest contentious policy. Take that Dijsselbloem! When searching for certainty in the global financial world, be smart and remember 2+2=5.


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14 Responses to “Notes From Underground: The Heaviness of Being a Global Macro Trader”

  1. kevinwaspi Says:

    “In an effort to PLACATE the Chinese, Treasury Secretary Robert Rubin reversed the STRONG DOLLAR mantra and ordered the FED to BUY YEN AND SELL DOLLARS. Complicating the politics was the fact that President Clinton did not inform the Japanese and provided a greater slight by not stopping in Tokyo.”

    And we have the gall to call the PBOC “currency manipulators”.
    Sister Mary Cecil told me, “Remember, When You Point a Finger at Someone, There Are Three More Pointing Back at You”

  2. Frank C. Says:

    No question this Thursday will be defining for Draghi and ECB and the markets. Draghi knows he was utterly embarrassed at last meeting and will try not to make same mistake.

    The spread between the bund and US ten year are widening. Which may be from the employment numbers. Or are they indicating that the markets anticipating Draghi has the votes to reduce 10-15 bps more?

    If Draghi is looking down the road to the refugees influx in spring and Brexit in summer he better save some ammunition.

    Don’t know if you saw this but always good to put a headlight on Goldman.

    • yra Says:

      Frank–thanks for the ZH Goldman post—-he makes many good points and raises serious issues but as usual Goldman in its standards of stability over democracy or “money is Fascist” fails to comprehend the political fallout from the ECB’s actions—see my response to Peter’s post

  3. Peter Says:

    And you wonder why Neo-Nazi and other Extremists are gaining support in Germany.

    I wish that only one reader would watch

    Hellstorm Exposed

    until you can not stomach it anymore.

    My German uncle was euthanized at the medical experimentation hospital in Regensburg, Germany in 1944.

    My other Germany uncle was severely wounded in the Battle of the Bulge in 1944 and became a forced labor on various French farms, until he was released in 1949.

    My clients were wealthy German businessmen, who has served in WWII as nobodies and became wealthy, as self-made men, in post-WWII Germany. One of my clients survived 7 years in Siberia.

    Anyone, who might spend 10 minutes watching this film, will understand how the German people were “tamed” by the Allies in WWII. I heard so many horror stories first hand from survivors that I am convinced that what is depicted in this film has strong ring of truth.

    Mrs. Merkel and her cohorts have betrayed their oath to the German people. Why. Because Germany is still a captive nation. The WWII victors still “occupy” Germany and control all German politics and political decisions. Germany is no less a vassal state, than Japan.

    All of this is, for me, sickening. I lived in the house of one of the top executives of Radio Free Europe in 1964 – Munich, Germany near the Perlacher Forst. Now, at age 72, I comprehend the subjugation of Germany by the USA and emasculation of the German people. Germany today has no military force. Is occupied by British and US soldiers and fliers. And is systematically betrayed by its leaders.

    The Germany that I knew via the generation, now dead, is no more. Germany will be allowed to make cars and machine parts until some other nation can match its work. The Germans are innovative. But, overburdened by the totality of political ballast, Germany will not survive, as a nation state, in two generations. By design. Or something else. Makes no difference.

    Disarmed and diffident, the German people have no chance. I wish I were not writing this epitaph. There is nothing I can do for them, except encourage the wealthy to sell out and permanently relocate [to where].

    • yra Says:

      Peter–there is a great deal here and I will not entertain the concept here but I will say this that the Germans will either pay reparations via transfer payouts to the peripheral nations in order to bailout the massive debts or Germany will create its own union—but as Bernard Connolly has written in the Rotten Heart of Europe ,the EU was an attempt by the European elite,especially France,to harness German industrial power to build a rival to the so -called Anglo-Saxon model–we would have Rhenish capitalism and Paris would be the center of the new European empire and Charlemagne would reign as an alternative to the U.S.—the only question is will the Burghers of Bavaria be willing to bear the brunt of financing the Grand Illusion—watch Putin as he moves to break this down but will the Germans grow weary of the Taxation Without Representation.When Draghi was made President of the ECB because Sarkozy out-maneuvered Merkel as the President of the ECB should have been Axel Weber so as to get German electorate buy-in for the policies of the ECB—and so it goes

    • GreenAB Says:

      “…The WWII victors still “occupy” Germany and control all German politics and political decisions. Germany is no less a vassal state, than Japan…”

      sorry, but this is not true.

      some examples:

      The war in Irak? without Germany.

      Climate Change? Germany has been on the forefront pushing for reduced CO2 emissions. Opposite of what the US wanted.

      Austerity? Everyone (including US,EUK,France) hates it – yet Germany is standing strong and forces it´s will onto other European countries.

      Harsh rules on banks (bail in)? The masters of the world hate us for that.

      There´s some truth to Germany being controlled when it comes to the work of intelligence agencies. Merkel´s phone, German web traffic…

      But overall – a growing economy, solid finances, a fair healthcare system, a reseasonable social safety net, low unemployment… life´s not that bad in this vassel state 😉

      • LITE Says:


        Very well put. You speak the truth. I was very taken back by the posting of the video. BMW today issued a statement regretting the use of slave labor in production during WWII.
        Throughout history the loser of any war has suffered tremendous hardship (rape, murder, theft, enslavement).
        This is true of Native American Tribes at war among themselves. It was Germany that invaded Poland.
        It was a German nation that confiscated the property of millions of GERMAN JEWS. Families were destroyed.

        Thank you sir for your response to the posted video.

  4. Chicken Says:

    Not awaiting Thursday to spring the trap apparently, it’s pouring dogs and cats again.

  5. Chicken Says:

    One redeeming feature is banks are being pole-axed as well, nice to see folks stepping up immediately. 🙂

  6. Alex Says:

    The last half dozen or so ECB meetings have given almost free money to EUR-USD traders.

    Go in with no position, wait for the announcement, if the initial moves holds over the next 2-5 mins, GO WITH IT, ESPECIALLY if the post movement is relatively tight.

    Markets are perverse though, as well all know only too well. So the above might now be reversed. But that’s no problem because it probably means everyone will be positioned the wrong way and so get ready to attack in the opposite direction.

    Whatever the case, if you gave me only one session to trade per month, it would be during and after Mr Slick’s Press Conference.

    • yra Says:

      Alex–have to think about the trading aspects and you are correct that patienece is the key and to take reads off the peripheral variables trading off the Euro—the days of jawboning by another Goldman supersalesmen is coming to an end—when sarkozy was french president the power axis with Merkel was known as Merkozy —the present axis of Merkel and Hollande I call MERDE—which is shit in French and it is going to shit on Draghi

      • Chicken Says:

        That was confusing, which way does euro move when SHTF? I don’t imagine up but surely Draghi wants down else what’s the purpose of snatching up non-performing loans.

        So if Draghi fails as anticipated, less debt translates to euro strength, no?

      • yra Says:

        Yes –but getting to it now

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