Notes From Underground

I’ve been staring at this image and keep thinking about the three living Fed Chairmen that sat on the stage April 7 and the fourth that was teleported from Washington, D.C. I was thinking about the replies to weak questions posed by the  moderator and better questions from the audience. I thought about the question I would have asked first. I would have asked each Fed Chair what they had thought about the role of GOLD in the post-Bretton Woods global financial system. Ben Bernanke famously opined that he didn’t understand GOLD but seemed very comfortable visualizing a role for BITCOIN. Yellen has never openly stated her concern about the barbarous relic. Back in the 1960s, Alan Greenspan wrote a serious paper for the Ayn Rand society on the important role of GOLD in a global system and more important for the impact of  GOLD for a democratic capitalist world.

But it was Volcker’s views I most wanted to hear. Back in the 1980s a friend of mind would lunch with Volcker in an official capacity and he told me the former Fed chair would regularly state that GOLD WAS A CENTRAL BANKER’S ENEMY. IF A CENTRAL BANK WAS PERFORMING RESPONSIBLY AND WITH A SENSIBLE FISCAL POLICY, THE PRICE OF GOLD SHOULD BE FAIRLY STABLE AT A RELATIVELY LOW LEVEL. Bernanke,in my opinion, didn’t understand GOLD because it acted in contravention to Bernanke’s theoretical predispositions. Volcker did provide a marvelous answer to the typical sophomoric media question about the proverbial punch bowl. When asked if Volcker thought his successors had spiked the punch bowl with vodka rather than removing it before the party started, Volcker proclaimed he was awed by their actions.

When pushed to comment further, he maintained his stance that he was awed. To conclude on the FED,  I refer back to the Greenspan image with the CNBC-generated caption: “Our ability to forecast is limited.” This emphasizes what I have thought and written over the past five years: WHILE COUCHED IN ADVANCED MATHS, FED POLICY IS NOT ROCKET SCIENCE for there is not even a high probability of outcomes. The media needs to stop genuflecting at the feet of FED chairs and begin challenging the conventional wisdom and madness of crowds.

***More from the madness of crowds: There were two important articles over the weekend that raised the issue of the impact of the ECB’s QE and TLTRO policies on domestic politics in Germany. Frank C. posted a link to the Der Spiegel story and it is certainly worth a read. In tomorrow’s Financial Times, the house paper of eurocrats and europhiles, has an article, “Germany Blames Mario Draghi For Rise of right-wing AfD Party.” Notes From Underground has maintained for a long while that the fall in Merkel’s political support was ignited by the refugee problem yet the greater threat to Chancellor Merkel was Mario Draghi’s policies financially repressing the Bavarian Burghers. Both these articles bring this argument to the fore. Alexander Dobrinda, a leader in the Christian Social Union (CSU) and the Bavarian party ally of Merkel’s CDU said: “The ECB is following a very risky course. The disappearance of interest rates creates a gaping hole in citizens’ old age preparations.” [reported to Die Welt]

This is the full intention of the Draghi QE policy: To force German savers to bail out the over indebted banks and nations of Europe. A perfect example was paraded about this weekend as Italy is trying to resolve the problem of non-performing loans affecting the ability of its banks to lend. Italy has an NPL-to-GDP ratio of 18% and it needs to relieve the banking system of this burden. The problem is that Italy’s public debt-to-GDP ratio is 132%, twice the legislated amount allowed under the Maastricht Treaty. The need to aid Italy means that German savers will be repressed to salvage Italy.

Ultimately, if Mario Draghi has his way, the ECB will purchase these assets and place them on the balance sheet of the bank and Germany will be on the hook for guaranteeing the subprime paper. This is a classic case of Carmen Reinhart’s work on financial repression as cited by Wikipedia: “Financial repression refers to “policies that result in savers earning returns below the rate of inflation in order to allow banks to provide cheap loans to companies and governments, reducing the burden of repayments.”

The awakening of the German saver class to Draghi’s financial repression will cause the demise of Chancellor Merkel. The BREXIT vote is just an introduction to the financial issues plaguing Europe. The Der Spiegel article quotes Nicholas Bomhard, the head of Munich Re, who said, “The people of Germany aren’t stupid.” This was referencing the result of negative interest rates creating greater distortions in wealth distribution. Draghi does not have support from those in Europe who maintain that the dysfunction political system has placed all the burden on the ECB.

Andrew Bosomworth, head of PIMCO in Germany, explained that the recent criticisms from German politicians were just an effort by the CDU/CSU to head off any possible helicopter money drops from the ECB: “This is a preemptive attempt to nip helicopter money in the bud before the discussion really gets going.” In my analysis, Mr. Bosomworth is badly mistaken. Draghi knows that a “helicopter drop” would be seen by the German Constitutional Court in Karlsruhe as the ECB’s attempt to involve itself in fiscal policy. As Merkel’s support erodes, the options available to President Draghi are reduced. Yes, all you investors keep buying EU sovereign debt for a buy and hold strategy. TRADERS KNOW BETTER.

***A quick note: The 5/ 30 yield curve closed above the 200-day moving average of 138.3 to 139.7. This should indicate RELATIVE weakness in the long end of the curve and will be tested by Baron’s cover story of Bill Gross calling for the need for higher rates. Bill Gross is very much in line with the Germans as he maintains that negative rates will destroy savers, which undermines the entire structure of capitalism. This is the first Friday close that violated the 200-day m.a. so let’s see if it can generate any momentum.

Tags: AfD, Alan Greenspan, Angela Merkel, Ben Bernanke, Brexit, CDU, ECB, Germany, Gold, Janet Yellen, Mario Draghi, Paul Volcker, QE, TLTRO, U.S. 5/30 curve

This entry was posted on April 10, 2016 at 3:59 pm and is filed under ECB, Fed. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.