Notes From Underground: A (Wo)man Hears What (S)he Wants to Hear and Disregards the Rest

Noise fills the airwaves and so many “pundits” keep the outlets from going dark by providing opinions that are less than ridiculous. These are the same people who failed to identify many of the significant political dynamics during the last few years. There is a viral video of Fox Business anchor Maria Bartiromo interviewing the much-maligned Jonathan Gruber. I have no opinion on the politics of the interview but I do offer this criticism of Gruber’s hypothesis of the positive outcome from the Affordable Care Act (ACA). Gruber raises the counterfactual that insurance costs and medical care would be at the same levels as now and maybe even higher and with the addition of 22 million people on the health insurance rolls, the ACA is a success.

Here is my criticism of the Gruber model as it allows “science” to support Gruber’s counterfactual. Gruber’s model allows for a dynamic pricing mechanism but maintains a static analysis of market forces and their impact on prices.Models that allow counterfactual arguments to flower need to be subject to analysis by allowing the critics to measure the assumptions upon which the model is based up. Gruber, counterfactuals are not FACTS.

1. Those promoting the current rally as a Reaganesque response to Trump’s desire for a massive fiscal stimulus should to be careful. This is not 1980 for the EQUITY MARKETS are on all-time highs, not suffering under the economic and market malaise of the high inflation and low productivity years of the 1970s. Also, we were far from full employment so the Reagan tax plan had enough labor market slack to be extremely effective. The Trump tax cuts will put upward pressure on wages, which will be a positive for Main Street but will also impact corporate profits. The U.S. stock market has been propelled by zero interest rates and record corporate profits since 2014 so higher wages will be a negative on continued high profits. If the stock markets are correct, then bond yields have to go higher, which will be another drag on stock values, especially with the huge amount of debt sitting on corporate balance sheets (debt that went to stock buybacks and dividends). The Reagan analogy is questionable.

2. The pundits discuss that Trump will be a protectionist as he owes debts to the Rust Belt voters who assured him the White House. But many of the Trump supporters are in the agricultural sector and as the last GDP number reflected, $10 billion dollars in soyabean sales is not hay. Farmers in the U.S. would be upset to lose access to the global food chain for if there is something the U.S. excels at it is growing grain and producing food.

3. The global response to the Trump election and Brexit puts Mario Draghi into a difficult position. The increase in U.S. yields is putting upward pressure on the U.S. dollar as the 10-year/bund differential has widened to 195 basis points. The weakness in the EURO ought to provide the ECB president the room to slow asset purchases but the December 4 Italian referendum is a possible political event that could disrupt European sovereign debt prices. The Italian 10-year BTP yield has risen by almost 70 basis points since Trump’s victory. During the summer the Italian 10-year was hovering around 110 basis points. The Italian economy and its huge amount of government debt, 132.5% of GDP, is at a critical level in which any increase in funding costs will make Italy’s promise to the EU budget overseers null and void.

If Renzi loses the referendum and Italian bond prices increase, Mario Draghi will be forced to either raise the ECB Large Scale Asset Purchases or change the ECB rules on purchase proportionality levels. The mounting pressure on Draghi will make him the most dangerous man in the world as he has a PRINTING PRESS. A new aggressive move by Draghi raises the fear of  fueling the fires of populism in France and Germany for the Germans are the ultimate guarantor of the ECB balance sheet.

4. The market is now convinced that the FED will raise rates at its December meeting but I would wait until the results of the Renzi referendum, and, more importantly, the November 28 B.I.S. meeting about capital needs and risk weightings. Also, will the FED be reticent to raise rates with the recent DOLLAR strength? I caution, do not just hear what you want to hear. Read and research and use technicals to find low levels of risk-taking that fundamentals lead you. These are going to be very volatile markets as we all struggle to understand the flotsam and jetsam of the global talking heads. For me the work load has just increased by geometric measures.


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9 Responses to “Notes From Underground: A (Wo)man Hears What (S)he Wants to Hear and Disregards the Rest”

  1. Stu f Says:


    Your titles always add the needed humour or memories that buffer world crap.


  2. Trader 1 Says:


    In the past you’ve mentioned FLR as infrastructure play.

    Was this a trade if we got Synchronized Global Infrastructure Stimulus or is just USA Domestic Infrastructure Stimulus enough to get these engineering type companies to work for a long trade??

  3. Chicken Says:

    Perhaps if your intentions are deviant, you’re liable to do whatever thing serves your needs. It might look like you got it wrong purely by accident or you can just claim insanity, who’s to argue?

  4. GreenAB Says:

    Yra, what do you make of the BOJ offering to buy unlimited amounts of 3 and 5 years in order to stop the rise in yields?

    Is it possible for them to hold rates down, when bond markets around the world are selling off? And if so – what would the consequence? A crashing Yen? Thanks a lot!

    • Chicken Says:

      Yra suggested before, if BOJ wanted a steeper curve they could buy the short end.

      • GreenAB Says:

        Yes Chicken, i understand that. The thing is that they are targeting long rates as well. Target for the 10y is at 0. Can they hold on this target (as well as the curve) when yields around the world skyrocket? Of course they could buy as much as they want. But i´m interested in the side effects of these measures (currency?).

    • Yra G Harris Says:

      Green AB–I will cover this aspect on Sunday but I agree with you that the BOJ is on a very dangerous course and it is interesting that Japan’s 2/10 curve has flattened while all othe rcurves have been steepening.I think you call on the Yen may prove right which is why I disagree with Druckenmiller on Gold over the medium term for all the major central banks are in a bind of their own making.Japan could feasibly repudiate its debt because it is the BOJ that presently owns so much of it—this has been so for quite awhile but as the BOJ is caught it is the NIKKEI that has proven the most favored asset–your point is well taken

  5. Yra G Harris Says:

    Reblogged this on Notes From Underground.

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