Notes From Underground

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.

Tags: BOJ, Brexit, Draghi, ECB, EU, EUR/CHF, Euro, Europe, Fed, George Soros, Gold, Kuroda, negative-yielding debt, Swiss Franc, U.S. Dollar, Yellen, Yuan

This entry was posted on June 9, 2016 at 3:23 pm and is filed under Central Banks, Currency. 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.