Notes From Underground: We Have Seen the Four Horsemen of the Apocalypse

The four living Fed chairmen have gathered in New York for a panel discussion for International House. News Flash: The discussion was disappointing as the moderator had too much censoring power at his discretion about who would answer the audience questions. Paul Volcker had a great response regarding concerns about the Chinese yuan replacing the dollar as the world’s key reserve currency. Volcker said if the U.S. would qualitatively deal with its responsibilities it was not a concern but would probably represent the Chinese becoming a real open economy. Also, Greenspan let it be known that the dual mandate is a nice talking point but the reality is that the FED does not make decisions in a vacuum. After Greenspan’s answer Yellen basically agreed. The moderator should have allowed Yellen to answer first since she is the sitting Fed Chair. Allowing Greenspan to answer first diminished Yellen’s response. Overall, the discussion was … meh.

It has proven to be that Sir Alan was himself the purist form of a Moral Hazard. My contempt for Greenspan and Bernanke is great, especially for his QE2 and QE3. QE1 was necessary to prevent a mass liquidation of all asset classes but Bernanke never seemed to know when enough was enough. It is the Bernanke model that has paved the way for the BOJ and ECB to take the Bernanke model to a RIDICULOUS level of liquidity creation.

In yesterday’s blog, I ASKED THE QUESTION: WHO GUARANTEES THE ECB? It seems others were asking the question today as the 10-year yields in Spain, Italy and Portugal all spiked higher by at least 10 basis points while 10-year yields in Germany and France actually dropped. Germany I understand, but the idea of French yields mirroring Germany’s is another example of the idiocy of global finance. France is economically weak and politically a potential disaster and thus the extra 35 basis points for purchasing French OATS will prove disastrous. The chart on the differential between German bunds and French oats shows the 200-day differential in yield comes in at 35.19 basis points. It closed right there as the differential threatens to break out above a long period of consolidation.

Be cognizant of the markets’ laziness as the ECB’s massive QE program has created a complacency and the desire for yield has kept markets from pricing in political risk. When the global financial world was very concerned about systemic political risk in Europe during July 2012, Spanish and Italian 10-year yields were well above 6%. The current threat of BREXIT is not for the U.K. but rather for Europe as a referendum in Britain will prove CONTAGIOUS for many other nation states in the EU.

Yesterday, the Dutch held a referendum on the EU’s Ukraine treaty and the vote was overwhelming opposed to the agreement crafted by the Brussels Eurocrats. The media portrayed the Dutch vote a result of low turnout and an issue that proved too difficult for the common man to understand. The end result is that it will further strengthen the BREXIT vote. I am beginning too think that the political idiot Cameron will try to cancel the referendum. Again, the great amount of global political uncertainty is not being priced into markets and this OUGHT to be on all our radar screens. Discretionary global macro trading is where profits are to be mined in the AGE OF UNCERTAINTY.

***Yesterday’s FOMC minutes didn’t reveal any surprises but confirmed last week’s thoughts that Yellen’s speech at the Economic Club of New York was her putting her seal upon the FOMC as being her FED. The regional presidents may give hawkish speeches but until Yellen suffers a split vote at an FOMC meeting, the Fed chair holds sway regardless of the noise that fills the airwaves. Yellen sits at the head of the FOMC like SHIVA wielding a TRIDENT. The dual mandate has been replaced by a new variable: global economic and financial headwinds. Yellen mentioned international developments and the dollar nine times in her New York speech and in reading the FOMC minutes several members noted the importance on international concerns, which just don’t know who they members are but it seems obvious that it was the Yellen group of governors that held sway.

For Yellen it is Nehru and not Nairu as globalization continues to keep U.S. wages stagnant. The FED chair appears to be very aware of the political landscape propelling voters for the anti-establishment candidates. It is the lack of wage growth that has promoted the Middle Class to raise its voice to the status quo  promoted by the Wall Street crowd. If the yield curves would begin to steepen we would have another solid indicator for this theory. (To read a solid report on the FOMC minutes, I suggest the annotated release from Bloomberg News.)

***Something critical to watch: The Euro/Swiss currency cross weakened today (euro is weaker than Swiss franc) and tested the 200-day moving average at 1.0850 amid concerns about the Italian banks, and, of course the drop in Deutsche Bank stock pushed European savers into the safe haven of Switzerland. The EUR/CHF cross held as it appeared that the SNB was defending the 200-day m.a. This is something to be aware of as the Dutch referendum vote gave rise to an uneasy feeling in European markets. In the FT  it is reported that Thierry Baudet, who led the campaign against the Ukraine Treaty and thus the referendum said the idea was “… sparked by David Cameron’s referendum.” Further, Baudet noted: “The point was we want the same as Britain. We want a renegotiation,and a referendum.”

Putin is laughing in the Kremlin while the “democrats” in Brussels are wondering how they will crush the desires of electors. BREXIT is about far more than Britain and Chancellor Merkel wonders when the Bavarian Burghers will man the barricades of direct democracy. It is a good thing I advised the CME Group to keep the Deutsche mark on the shelf when I was a director. Bunds or oats, I will not be placated by a mere 35 basis points even for a little more capital appreciation in the near term. It is the TROIKA of the Apocalypse for the discussion has shifted across the pond: IMF, European Commission and Draghi’s ECB.


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11 Responses to “Notes From Underground: We Have Seen the Four Horsemen of the Apocalypse”

  1. Richard H Papp Says:

    For those who might of missed Ambrose-Evans Pritchard 06 April 16 column in entitled “Time to Stop Dancing with Equities on a Live Volcano take the time to read it.

  2. Chicken Says:

    Thanks Yra, for making the picture more clear.

  3. Chicken Says:

    Doves out fluttering around, we must closely monitor these public dog and pony shows on an hourly basis or just listen to Dimon, who gets what he wants.

    Italian bank bank program, euro banks rally but is it toophless?

  4. Joe Says:

    Yra–“It is a good thing I advised the CME Group to keep the Deutsche mark on the shelf when I was a director.” Yes. And very few wanted to publicly utter any heresy that the grand Euro plan for realignment and hedgemony couldn’t work or might fail.

    • yra Says:

      Joe–when I told Jean Claude Trichet in a meeting at the CME in 2003 that we still had a Deutschemark contract he said it was “Absurd and Preposterous”—the great thing about my six years on the board during the transition period was the incredible people I was able to meet and talk with—when Sen.Phil Graham was coming through Chicago for his victory lap before he retired ,in a Board Room meeting I had the pleasure of asking him in 2002,whether or not the dismantling of Glass-Steagall by the enacting Graham,Leach,Bliley caused any sleepless nights?He rolled his eyes and admitted YES and I think Pat Lynch and Jeff Carter are still laughing—point is that the repeal of Glass-Steagall promoted by Summers,Greenspan and Bill Clinton will remain a dark moment regardless of what the talking heads prattle about.Andrew Sorkin ,sycophant to wall street cites Jamie Dimon for saying the repeal of Glass-Steagall had nothing to do with the great financial debacle but I would vociferously argue otherwise—-

      • Joe Says:

        Yra–Glass-Steagall–history shows you took the right side. Had it been a true effort at deregulation to expand and increase capital market efficiency, policy makers would never have left the moral hazards via the public guarantees in place, and likely have come to the conclusion it wasn’t worth tinkering with in the first place. The public at large thought of the repeal along the lines of trucking and airline deregulation therefore little push back from Main St while Wall St. lawyers were crossing the t’s and dotting the i’s of the new “model.” It made me realize that there hasn’t been any real capitalists on Wall St. in many decades.

  5. Frank C. Says:

    As fool disclosure I haven’t watched the Fed Chairman video. (But did VCR it).

    Yra you very politely state ” the moderator should have allowed…”

    I have a different opinion.

    The moderator, Fahreed Zakaira should not have been allowed to moderate!!

    Two simple reason.

    1) He is not an economist, nor business journalist.
    What does he know about the economics – he wouldn’t know the Taylor Rule from the disproved Phillips Curve from his elbow or other parts of his anatomy. His degrees are in POLITICS.

    2) Fahreed is a known and proven Plagiarist. Please google fahreed zakaira and see how many hits you get. He was suspended from CNN for his plagiarism.

    This Zaakira guy makes Megayn Kelly looks like Mike Wallace.

    What a sham that these four Fed chairmen would agree to be interviewed by such a fraud.

    Where is Rick Santelli when the we all need him to ask an honest question.

    • yra Says:

      Frank C,–I thought that very same thing as I watched the discussion continue and yet all morning the folks at Bloomberg kept blathering about the great job the hard hitting ZakaiRA did—i failed to see or hear it–I loved Volcker when he commented that his was “awed” by his three followers when he was asked if they had spiked the punch bowl with Vodka—he is a great man

  6. Frank C. Says:

    Here is a really interesting story from der Spiegel with Schauble commenting on Draghi’s policies as calamitous.

  7. Johnny Dangereaux Says:

    I believe there is a market in paper DMarks…my coinshop was paying .70c I think…

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