Notes From Underground: Alfred E. Neuman or Arthur Fonzarelli? Pick Your Poison

Since I’m 62 years old, my references of social icons goes back to a more simple time. Alfred E. Neuman of Mad Magazine fame would ask, “What, Me Worry?” The other side of the equation would be Arthur Fonzarelli from the television show, “Happy Days.” who would stutter before ever admitting that he was WRONG. The world’s central banks are a reflection of these two icons. It seems that Yellen, Draghi and Kuroda all suffer from both views. They have nothing to worry about and they certainly cannot admit to being wrong. The central banks are under attack from investors and traders for pursuing quantitative easing and negative yields even though the efficacy of such programs is certainly in doubt.

The balance sheets of the FED, ECB and BOJ  have reached significant proportions of the total amount of outstanding sovereign debt, which has led to massive distortions in all asset classes. The response from the THREE TENORS: “It would have been much worse if not for the actions of our esteemed institutions.” Again, the POTEMKIN VILLAGE of counterfactual constructions. BUT WHAT IF THE FED and others are wrong in their policies?

Well, the master theoreticians may want to lend an ear to seasoned practitioners and STOP THE PRESSES. Rescind the negative yields and let the markets have a greater hand in setting the price of bonds. BUT THAT WOULD MEAN THAT THE WORLD’S CENTRAL BANKS AND THEIR MODELS MAY HAVE TO ADMIT THE POSSIBILITY OF BEING WRONG. The first rule of being in a hole is (of course) stop digging. But the ECB and BOJ are doing the exact opposite: They continue digging. The ECB now is buying corporate debt, which is resulting in multinational firms issuing EURO-denominated instruments knowing there is a ready buyer and is pushing corporate bond prices to absurd levels.

Again, central bank policy has broken the pricing mechanism of the global debt markets. It is not the $10 TRILLION of negative-yielding sovereign debt that WORRIES me but the $40 TRILLION of money being forced into assets that are not priced to the risk profile they carry. The number of quality voices speaking about the negative outcomes from FED policy should raise concerns from the world’s bankers, but instead we get Alfred E. Neuman.

***Things to consider from today’s news: First, George Soros was profiled in a WSJ article in which it was revealed that the present turbulent times have brought him out of hibernation. The “palindrome” had relegated daily activities to his underlings but George is back calling the shots and directing trades. On February 1, I was on with Rick Santelli after Soros, Druckenmiller, Bass and Tepper put out a call on a depreciation of the Chinese yuan. My response was that if they thought the YUAN was going to depreciate 30% then it made sense to BUY GOLD AND BONDS because a large depreciation of the YUAN would unleash massive deflationary pressures  on the global economy. It seems that George was doing exactly that as he has built up a sizable position in the BULLION and the MINERS.

The most disturbing part of the SOROS piece is that while he thinks the British referendum for Brexit will fail, he is fearful about the entire EU project and fears for its existence. This is bothersome for Soros has been one of the EU’s main cheerleaders. He admonished Germany for its stance on fiscal austerity, and, more importantly, he has called for the creation of a EUROBOND in an effort to consolidate EU sovereign debt and form a harmonized credit and fiscal union. If SOROS is WORRYING about EUROPE based on issues besides BREXIT he will have to make the play in the EUROPEAN sovereign debt markets. IF THE EU IS CALLED INTO QUESTION THEN THE BUND NEEDS TO OWNED AND ALL THE DEBT-PLAGUED NATIONS’ PAPER SOLD: bunds versus French, Italian, Spanish and all other weak EU instruments, and certainly the banks who hold vast amounts of sovereign market debt. But I caution: Be patient with this for if the BRITS vote to remain in the EU, the peripheral debt will INITIALLY RALLY as a sense of relief will give support to peripheral bond prices.

It will be important will be to watch valuations in the week after to monitor a sense of fear about rising concerns in Brussels. Yesterday, Ambrose Evans-Pritchard wrote a piece titled, “France Shuns Europe As Brexit Revolt Spreads.” Evans-Pritchard quotes Professor Brigitte Granville, a French economist, who said, “It is a protest against the elites. There are 5,000 people in charge of everything in France. They are all linked by scholl and marriage, and they are tight.” The article cites many other voices of concern about the revolt against the elites but Prof. Granville states a big part of the problem: “The EU was sold to the French people as a partnership of equals with Germany. But it has been very clear since 2010 that this is not the case. Everybody could see that Germany decided everything in Greece.” The politics of the EU are difficult on a good day but it has become more complicated as the ECB has created a balance sheet piled high with mispriced sovereign debt. George Soros is much different from Janet Yellen for as a philosopher king he may worry he is wrong but as a trader he has no worries about protecting his wealth … Alfred E. Neuman indeed.

In today’s markets we continue to see some divergence in previous correlative positions. Gold defied the DOLLAR rally and continued to gain against all fiat currency. It’s interesting for the currency markets but staying within a search for safe havens, the EUR/CHF fell below the 200-day moving average for first time in 10 months. It is only one day but this is something to watch because the intervention by the Swiss National Bank (SNB) has been active to alleviate upward pressure on the Swiss franc. The SNB balance sheet has grown to 620 billion Swiss francs as they sell Swiss and buy euros and other assets.

It is problematic for the SNB policy of weakening the Swiss franc. The SNB may deem this a short-term problem caused by BREXIT hedges but this is certainly a chart to watch. The Japanese authorities are also concerned because the EUR/YEN today made three-year lows as nervous investors are fleeing Europe and seeking safety elsewhere. The U.S. dollar is not the major recipient of investor angst as in times past as the DOLLAR has not recovered from its UNEMPLOYMENT DATA  selloff. So many asset classes are in motion but as a trader I am forced to admit I am wrong though the many elements of uncertainty leave me to worry. Trade with fervor, invest with fear.

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15 Responses to “Notes From Underground: Alfred E. Neuman or Arthur Fonzarelli? Pick Your Poison”

  1. Tom Says:

    Oh the perpetual motion machine spins another day.

    I wonder if Trump takes charge; can he make the WORLD great again while he’s doing a number on USA. As we speak he is being briefed on six-grade economics.

    • yra Says:

      Tom–the perpetual money machine is correct.On Trump I keep politics out of the blog unless a certain policy seeps into a possible trade as stupidity or brilliance is agnostic and will continue to be analyzed as such.See Irving Fisher on the perpetual money machine

  2. Chris Says:

    Even as Clinton says “Let them eat cake”.

  3. GreenAB Says:

    “the three tenors” 🙂 *lol* ! sing Janet, sing!

    as for France: in their case Germany isn´t the problem. the country has been unable to reform itself, while the German labor market was changed big time in 2005 – see

    this reform, while negative initially, made German jobs competitive and attractive for employers again and it laid the foundation for the economic success Germany is profiting off to this day.

    meanwhile in France the elite class hasn´t had the guts to put any kind of reform into place, whitnessing how it crushed the then governing party in Germany. the SPD (social democrats) hasn´t recovered until today and still isn´t getting any credit for their couragous action. what makes it also hard for France to reform is the powerful unions.

    compare these unemployment rates:


    GER: 11.7%
    FRA: 8.87%


    GER: 6.4%
    FRA: 10.1%

    you see how these countries diverged in different directions. it has nothing to do with the EU or Germany setting the pace on Greece. the French are responsible for their own demise.

    over the last months Hollande has started to act. let´s see if he will succeed. major strikes all over country until last week, mabye even during the ERUO2016 (not the currency but SOCCER 😉 )

    • yra Says:

      Green AB–over the last six years I have noted the importance of Hartz 4 and found it interesting that Schroeder called that election two year ahead of schedule when he can have received the full force of the positive outcome of hartz–but instead he lost the election and went to work for Putin,I mean Gazprom

      • GreenAB Says:

        Yra, nice to see that you´re familar even with German labour reforms!

        Schroeder tgought he had to do it. Germany was in deep, deep trouble at that time as can be seen by the unemployment rate. and then the party of the little guy had the nerve to make things even worse for those people in the short term (while the long term success wasn´t seen by the voters). maybe you know about that – in Germany laws have to go through the “Bundesrat” , which constitutes by the states. the SPD lost one state election after another. after they lost the most populous state Nordrhein-Westfalern, which has always been a lock for SPD, he had no other choice. not only were the voters against him, the party was rebelling too. maybe he could have waited, but in Germany the chancellor needs the party on his side.

        meanwhile Schröder was still popular compared to the candidates of the CDU. nobody really saw anything in Merkel back then. she was the head of the CDU, but lacking any personality or charisma. so Schroeder took the gamble and proactively tried to get legtimation of his policy. and he only failed by a hair. maybe he could have remained chancellor, if it wasn´t for his infamous show during the post election debate when he attacked Merkel and seemed kind of drunk.

        it´s kind of tragic, that he had the vision, what had to be done. yet in the process it ruined the SPD, which had 40% in 1998 and is on record lows in recent polls (below 20%). meanwhile Merkel and the CDU had to do nothing but earn the benefits, take a popular idea from their competitors here and there, and sit on their hands.

        ironically these days it´s Merkel who is sticking to her principles in the refugee crisis. and now it´s the CDU that is getting killed in the polls. together the two former peoples parties just get slighty above 50%.

        i have the highest respect for Schröder and Merkel is earning hers as well.

  4. tw Says:

    I find it interesting that Soros announces or rather, makes public his positioning, in light of his theory of reflexivity. It’s like he provides the info with the intention of seeing how the market will respond to the comments, and then response to the response to either confirm his positioning (then adding) or making adjustments.

  5. Blacklisted Says:

    While the Collectivist “reshape the world to their hearts desire”, the rest have their heads in the sand or in the clouds, believing their inaction does not contribute to our demise. Knowledge is just as blissful as ignorance when no action is taken.

  6. david cooper Says:

    2 new brexit polls showing “leave” getting a bigger edge. Sterling vol explodes meanwhile treasury call buying continues and volatility rises.

  7. Chicken Says:

    Hubris truly is infinite, I
    know this from growing up inside the beltway amongst these monsters. Respect them much the same as a venomous snake. It’s not a matter of being wrong, they have no concept of wrong, no such thing.

  8. Tom Says:

    I had never heard of Irving Fisher. I Googled him. Interesting.

    My point on the perpetual motion machine and the prez- politics is the combination of fiat currecies ( modern economies) and a potential leader with a rudimentary knowledge of anything having his hands on the levers of power.

    And the nuke codes.

    • Chicken Says:

      Do you recall, Reagan was also inept? I tend to evaluate past performance, and project that forward. Just say in…

  9. Arthur Says:

    The biggest macro question is always: What type of market are we in? …

    • yra Says:

      Arthur–a market distorted by the machinations of academics using the power of central banks to put into practice theoretical experiments of monetary theory

  10. pittrader1988 Says:

    anti-elite sentiment all over the place. Lenin used it to topple the Czars. Imagine if the internet would have existed back then.

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