Notes From Underground: The Answer Is, “We’ll See”

The experts are out with more ridiculous forecasts about the Trump victory and what it means for the various aspects of the financial markets. But let me toot my own horn for a moment: The trading outcomes for a Trump victory were on target, except for the dollar rally sustaining itself, but that is something I will be analyzing as we go forward. It amazes me how the media rushes back to the same forecasters who have so badly predicted many of the major political outcomes of the last two years. An important book for my readers is Tetlock’s “Superforecasting,” which makes a very powerful argument about following the experts.

But the movement in the STEEPENERS has been “breathtaking.” I want to go on record as saying I disagree with Stan Druckenmiller’s long-term view on the GOLD. This now becomes GOLD versus all fiat currencies so LONG GOLD versus yen, euro, Swiss and anything else as the central banks have started down a dangerous path since the ECB, BOJ and BOE continue on the road of large-scale asset purchases, or QE. The only way this trade will turn is if SHORT-TERM RATES GO TO REAL YIELDS ON THE SHORT END OF THE CURVE. CURVE STEEPENERS WILL NOT HURT ASSETS BECAUSE THEY WILL BE FUNDED WITH ULTRA CHEAP SHORT TERM BORROWING.

There are many things afoot in the global financial world as politics becomes the center piece of financial decisions. We have the Italian referendum on December 4, the FOMC mid-month and the coming French elections. So many moving parts, and, of course we have the actual economic data, which has been tepid around the world. The Trump headwind will give the FED an excuse to keep rates on hold as Yellen and Brainard seek to be on guard to see to it that WAGES run hot.

Also, an important piece to the interest rate puzzle was covered in a Financial Times piece by John Dizard, who notes the significance of the November 28-29 meeting of the Basel Committee on Banking Supervision and its review of the use of their internal Value at Risk (VAR) models that sets capital ratios based on risk. Currently, all sovereign debt is treated as a ZERO RISK WEIGHT. Any change to this current model of risk valuation will result in a rush to raise capital to meet new regulations.

In Dizard’s words, “The specific point of contention is whether the G-20 banks should be able to use their own internal risk models to determine how much of their own capital they should set aside for a given type of lending or securities. U.S. regulators seem to hate models. They think that there should be one range of risk weights  for any class of lending, such as project finance.” This is a battle that will severely divide the G-20 so pay attention.

The bottom line (for now): The Trump victory will ruin good and bad people as the stables are swept clean so let us not practice Schadenfreude but roll up our sleeves to fix some of the major problems that plague the U.S. economy. Don’t rejoice in the defeat of your enemy but work to put in place the lessons learned through the arduous battle: “With Malice Towards None, Charity For All” (Abraham Lincoln).

We will get to work looking ahead but I warn against any long-term trades or investments until more is known. Remember what Secretary Lew recently said: “Brexit vote is the adoption of a political idea that most experts say is wrong.” Goodbye Secretary Lew. I hope that you are replaced by the most competent Treasury Secretary, Sheila Bair, who did her best to protect Main Street against the tyrannical excesses of Tim Geithner’s efforts to save Wall Street in its pre-crisis form. Can you hear me Donald? SHEILA BAIR IS THE ONE.

 

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23 Responses to “Notes From Underground: The Answer Is, “We’ll See””

  1. Arthur Says:

    How will Trump engage w/ the world? Is Trump populist, nativism?

  2. Alex Says:

    Arthur, hopefully he’ll get back to basics, what America is good at – business and making money.

    And the best business is done between 2 entities that like each other. The US has lost many friends in the world over the last 15 years so let’s hope Trump starts to reach out. Sadly it’s not the American people that are not liked, they are very likable, it’s the government that has been the problem.

    If Trump can fix the above it would be great for everyone even if you don’t like the man. And on that point, if people don’t like him, fine, but don’t say anything bad about the lovely Melania.

    Personally I think Trump will be a 50-50 shot. He’s either going to blow big time or he’s going to be one hell of a success, nothing in between. Few expected him to get this far, few are expecting him to be good so the smart bet would probably be to bet he’s going to be good.

  3. Bojo Says:

    Great post, Yra, as always. I agree about the mainstream media, what intellectual laziness..
    According to Catherine Austin Fitts, around 25 trillion dollars have gone missing from the federal budget, mainly defense, since 1995 in ”undocumentable adjustables” or something… and many trillions gone through derivatives.. Where is the money?
    I have a feeling that Trump might be the perfect patsy when all this comes to pass. Our policies would have worked if it wasn’t for Trump.. or Putin.. or somebody.
    And yes, with charity towards everybody, but with focus on truth and not false positivity in the US of Disneyland.

  4. Trader 1 Says:

    Yra,

    “sovereign debt is treated as a ZERO RISK WEIGHT” – Wouldnt the pressure from “elites” on Basel to NOT change the risk weighting of sovereign debt put the odds of it happening at like .001%??

    Or am I missing something in your thought process of Basel changing the risk weighting of sovereign debt??

    • Yra G Harris Says:

      Trader—I think you are correct but the issue will be very divisive as the BIS TRIES to be very firm in its analysis and recommendations which make the Europeans very unhappy—they believe it is not the time for new regulations as the EU banking system is far to fragile—but your point is noted and this is why it could be very important going forward especially as investors are rushing intop bank stocks

  5. COSTAS LOS Says:

    Thanks Yra, great info on VAR G20 banks . Curious of Druckenmiller to announce his gold sale on TV. Why would he? It’s the sort of news that could only be of interest to algo handlers and specs. I couldn’t find the full feed but did he say he sold gold bars, unallocated gold certificates or was he just shorting GC in the Comex? …makes a difference which. All the best, Costas

  6. Chicken Says:

    Bair’s a fantastic suggestion, good thinking!

  7. The bigman Says:

    Yra are we back on the other side of the looking glass? Agree on Sheila Bair for Treasury. Do not need another robber baron from GS. Here’s my naive armchair deplorable view of the next year unfettered by any formal economic training: Mild recession first half. After which the velocity of all this newly minted money sky rockets fueled by a couple trillion in repatriated earnings and fiscal stimulus that overwhelms the feckless fed heads and leads to significant inflation. Gold is on sale today and I am buying. Am I nuts?. Deplorably yours the bigman

    • Yra G Harris Says:

      Bigman—-very good post and your sense about the possible velocity of the unleashing of “parjked reserves” certainly may play out—-on the gold as I posited in this blog last night I understand well the initial sell off in Gold as rising rates is sending bulls out of the market.I do not make a living catching falling knives and i will look for low risk levels to buy Gold and sell various currencies for most of the world’s central banks have committed to a ridiculous policy that cannot be sustained.And to all those who think the Yellen Fed will raise rates in a strengthening dollar environment ,I say think long and hard about this.As I read Fischer’s speech he is definitely on the side of international concerns.But as I always advise ,select the lowest rsik possible levels to make your trades.I will write more about the impact of rising bond yields and the spending plans of Trump.

      • Chicken Says:

        Risk appears considerably lower today than last week, for example. 🙂

        Assuming we’re witnessing the wind-down of financial repression the sequence should be banks, gold, oil in that order, and it’s pretty common to have an asset punched in the face just prior to taking off to the moon?

        Personally, I don’t feel compelled to reach for gold b/c I feel it’s manipulated by a large interest, as if the three best global traders control it. Others claim it always gives a clear signal but I can’t read those leaves apparently.

    • Chicken Says:

      I suspect the trapped reserves you reference are just a financial accounting sleight of hand tactic and those capital are already here. Last tax holiday resulted in no follow-through hiring and buildout bonanza as was sold?

      Rinse and repeat verbage, IMO

  8. Chicken Says:

    Oh, and Fannie-Mae deserves an honorable mention.

  9. Chicken Says:

    The biggest theme I think I see is the simplest one where the bought and paid for media was hyping a huge crash if Donald was elected. Surprise, surprise!

  10. Chicken Says:

    Draghi – Is this guy still holding onto his 80 billion in preparation for deployment?

  11. Arthur Says:

    Trump can lead to two things: inflation and geopolitical chaos. Both are very bullish for gold.

  12. Chicken Says:

    Looks like market is pricing in a failure of the euro. That’s big news but MSM crickets chirping aside from calling for an assassination.

  13. Chicken Says:

    “Rates must be lifted otherwise risk taking may become excessive” – Yellen

  14. Forex Robot Nation Says:

    I am just fascinated with your thoughtful strategy, let’s connect some point.

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