Notes From Underground: Oh, When Will They Ever Learn?

This is a tough POST to write  for I will criticize a newspaper I have read every day for at least 30 years. (In fact, I still have it delivered on my doorstep and read most of it online in the evening before the hard copy arrives.) The London Financial Times had a front page story, “Troubled Italian Banks Face Fresh Risk of Failing If Renzi Loses Vote.” This is a deplorable headline for it harkens back to the days of the mainstream media warning of dire consequences if Brexit passed and the Trump was elected president. THIS IS SCARE MONGERING. It raises the question: When will the Davos crowd EVER LEARN?

The Italian referendum on the restructuring of the Italian legislature is not the cause of the massive amount of nonperforming loans plaguing the Italian financial system. For the last 24 months I have said the suspected 18% of NPLs on Italian bank balance sheets was fostering zombie financial institutions. This year, the Italian Bank Equity index has dropped 46 percent as investors have sold Italian bank stocks in fear of the need for a massive capital increase. In a very Machiavellian sense (this is Italy, after all, I would vehemently argue that Prime Minister Renzi would be better off losing the referendum and initiating a crisis in the European Union.

The Germans and French won’t allow a Greek exit for fear of destabilizing the entire financial system. A fear of the collapse in the Italian banking system would push Chancellor Merkel, French President Hollande and ECB President Mario Draghi to “do whatever it takes” to support Italy. Renzi has turned the December 4 referendum into a poll on his government and has threatened that he would resign upon the referendum’s defeat. This is a great way to BLACKMAIL Brussels and the eurocrat elite into backstopping Italy’s sclerotic financial system. As the FT article noted: “The situation is being closely watched by policymakers, who worry that Italian bank failures might trigger broader turmoil across the eurozone bank system.” The scaremongering promoted by the EU House Paper will not support Renzi. When will they ever learn? When will they ever learn?

***In September, the Bank of Japan embarked on a program to TRY and STEEPEN its yield curve by purchasing an unlimited amount of 10-YEAR JGBs. In an interview with Rick Santelli, I said the BOJ was going about it wrong. If it wanted to steepen the curve it OUGHT to relegate its PURCHASES to the short-end of the curve and let market forces set the rate at the long-end, which would result in a steepening. The quick rise in long-term interest rates since the Trump victory has resulted in STEEPER yield curves everywhere BUT JAPAN. The U.S. and European 2/10 curves have ALL STEEPENED, but  Japan’s has actually FLATTENED in the same period, negating the BOJ‘s desired policy of a steeper yield curve.

The BOJ is citing some success with recent rising inflation but the BOJ’s  ill-formed policy is preventing market forces from performing so the only effect has been a weakening of the YEN. It’s not necessarily a bad outcome but certainly not the result that the BOJ had thought to achieve. If the BOJ doesn’t reconsider its current policy the entire Japanese financial system can be overburdened by the continued massive buying of 10-YEAR NOTES. This is one of the reasons why I prefer to be LONG GOLD AGAINST VARIOUS CURRENCIES. While GOLD has weakened against the U.S.DOLLAR, the gold/yen is just about unchanged on the month. Again, central bank HUBRIS has broken the signalling mechanism of global bond markets. When will they ever learn? When will they ever learn?

***More from Europe: Last Tuesday, MNI had an interesting piece by reporter Angelika Papamiltiadou titled, “IMF Still On Board In Greece Programme, Plan B Mulled.” In the continuing Greek tragedy of DEBT sustainability the IMF wants more restructuring and squeezing of the BUDGET expenditures in order to meet previous agreements. The IMF would prefer that more DEBT is written down and creditors take a bigger haircut but Brussels worries about the political and financial fallout. IMF Director Lagarde is under pressure from its staff for bending long-held IMF strictures on bailouts so she is treading carefully so as not to foment a bureaucratic uprising.

As the article said: “The EU does not want to engage on anything that will demand further debt measures and Greece does not want to pledge on fiscal measures beyond 2018, as the country’s next scheduled national elections are expected to take place in 2019.” It is in this light that Italian Prime Minister Renzi will be able to exact great treasure from the EU for an Italian financial debacle is of far greater significance than Greece. ECB President Mario Draghi is trying to hold to his pledge of  “whatever it takes to preserve” the European project but the costs are escalating as the ECB increases its BALANCE SHEET by  80 billion euros each month.

My question to FOMC Governor Powell continues to resonate. WHO GUARANTEES THE ECB? His answer (of course): “They have a printing press.” When will they ever learn? Oh, when will they ever learn? French bank SocGen has a fabulous cover for its 2017 outlook, denoting what bodes ill for the coming years. This will be our continued preoccupation for all things in the realm of Notes From Underground, where 2+2=5.

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8 Responses to “Notes From Underground: Oh, When Will They Ever Learn?”

  1. Asherz Says:

    The Davis crowd will never learn for to change direction now will ultimately result in their losing power. Brexit and Trump election show the beginning of the cracks in the elite facade. Mispricing of all markets will inevidently end with a Big Bang instead of a pop. Business cycles allow for cleansing of mistakes. “All it takes” prevents the fever that is curative.
    The Davos pundits will be found frozen in the mountain like mastodons with remnants of Financial Times scraps by their side.

    • Chicken Says:

      It takes time and careful planning to move trillions, Draghi is doing his best to provide that cover and he’s paid well for his hard work.

  2. Arthur Says:

    Same feeling with The Economist. Sad. There is no better way to think about human irrationality than to read Dostoevsky, and there is no better macro reader of Dostoevsky than Mr. Harris. Thanks.

  3. the bigman Says:

    Mean while half was around the world and through the looking glass:

    Where have all the rupees gone- long time passing Where have the rupees gone a long time ago Modi’s picked them every one when will they ever learn?

    Ira what is your take on this move by Modi and its effect on Gold and silver?

  4. GreenAB Says:

    thanks Yra, especially for the Japan part! It´s the most interesting country to me. They will definety get their inflation. Maybe much more than they would want to see if the Yen keeps dropping like a rock.

    As for the Italy referendum: I wouldn´t say that it´s fearmongering. The reality is that new elections would be held in Italy, if Renzi fails. And current polls have eurosceptic parties in the lead. Without Italy it would be very hard to hold the Eurozone togetehr. So there is a real danger imo. Meanwhile the markets seem to become complacent. The Brexit losses lasted only a few days, the Trump dip only a few hours. So why even worry about Italy? But maybe this time it´s different…

    • Yra G Harris Says:

      Green AB–also glad to hear the opinion from across the pond.You have been a constructive poster for many years and I think that Italy is certainly a different animal for the EU.But we will discuss this more in the days ahead

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