Notes From Underground: What a Long Strange Trip It’s Been

This year has been a year of surprises as conventional wisdom-based forecasts have proven to be like oral agreements: not worth the paper on which they are written. The coming year promises to bring more confusion and volatility as the markets are preparing for the U.S. to be a Trumpian utopia of wealth creation. I caution against blindly accepting this narrative for it will not be a U.S.-centric year. Attention will turn to Europe as the political cycle brings elections in the main players. France and Germany are the EU and the rest just the trimmings (so stated Charles De Gaulle). The EU is fraught with problems, so the more uncertainty raises the profile of the ECB President Mario Draghi. Senator Charles Schumer once said to Fed Chair Ben Bernanke, “You are the only game in town.” Well, an ECB with a printing press and no political accountability provides a central bank on steroids. Mario Draghi perceives himself as the savior of the EU project so expect him to be hyperactive in response to any major political changes in France. Greece, Italy and Spain still remain an economic issue so the entire EU financial system will be subject to paroxysms within its debt and equity markets.

Today, FAST FT had an article titled, “ECB Should Not Be Afraid to Raise Interest Rates, Says Bundesbank Chief.” Jens Weidmann has been a dissenter on the continued hyper-active QE program of the ECB and certainly one opposed to the negative interest regime. Weidmann said, “… the real litmus test for the ECB would come when ‘it becomes clear that monetary policy must be normalized with a view to price developments.'” Weidmann seems to be setting the agenda for the Bundesbank pushing back against the unmitigated  authority of President Draghi. When citizens in Germany tried to block some ECB policies because they violated German law, the high German Court allowed the European Court of Justice to resolve the question. The EU High Court sided with Draghi and the ECB because the need for the European Union to survive made the Outright Monetary Transactions (OMT) lawful, basically delivering President Draghi the power to do “whatever it takes” without taboos. The issue of ECB bond purchases will continue to be challenged and may well be the main issue in the coming German election.

The conventional wisdom is that immigration will be a paramount issue for Chancellor Merkel but I opine that the ECB will be more important as the question I continually pose is: “Who guarantees the ECB?” Every buyer of EU sovereign bonds –Italian, French, Spanish, Portuguese, Greece–believes it is the German credit card that provides collateral for the entire EU. Otherwise, how else could Italian 10-year notes be yielding 70 basis points less than the U.S. In terms of two-year yields the differential is 135 basis points. So understand this: Italy, a country with a debt-to-GDP ratio of 135%, without control of its own currency and in the throes of a banking crisis, can borrow money for much lower rates than the United States. Everything falls upon the Bavarian Burghers to sustain the credibility of the ECB. Again, Weidmann seems to have taken a very public stance on the ECB’S QE program. The past year was a “long strange trip” and I wonder if 2017 will be  a financial “box of rain.”

Wishing all my readers a wonderful holiday season. May it be a meaningful holiday time whether you’re celebrating Christmas, Hanukkah, Kwanzaa or anything else that brings joy and meaning to your life. All the best, Yra.

 

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11 Responses to “Notes From Underground: What a Long Strange Trip It’s Been”

  1. Rob Syp Says:

    Thanks for simply stating how Italy with it’s all issues can borrow money from the ECB cheaper than the U. S. can. Your blog throws so many things at us that’s it refreshing to understand how screwed up that is.

    Maybe you can incorporate more of that in future writing’s. By all means write the way you do but how you summed up this blog try to do more of that in the future.

    Like the TV shows of the 70’s there was Act I II III IV and Epilogue.

    That’s how I view the Italy summation in this blog as the Epilogue.

  2. Arthur Says:

    Great summary. I observe three thematic risks: Europe, Japan’s currency and the Chinese economy.

  3. kevinwaspi Says:

    Yra,
    Have a blessed Hanukkah, and a healthy, wealthy, and wise New Year. Thank you for continuing this blog and stimulating thoughts shared between friends. All the best, stay safe.
    Kevin

  4. Chicken Says:

    So far it does seem to be the German credit card is able to absorb the woes, it’s an amazing unrevokable card.

  5. Chicken Says:

    Trump vs FED – Seems Yellen is moving to hedge Trumps fiscal stimulus pledges. What are the chances Trump takes aim at the FED given he seems to be embracing the enemy?

    Putin has a lot of spending increases to implement if he intends on competing up with DC’s current 1Trillion annual military acetylene torch.

  6. Joe Stoutenburgh Says:

    Uh-oh… are things starting to seriously unravel?

    Bloomberg 12/23/16

    Paschi’s Fatal Sin Brings Nationalization for Oldest Bank
    https://www.bloomberg.com/news/articles/2016-12-23/monte-paschi-s-fatal-sin-brings-nationalization-for-oldest-bank

    ““It’s a national tragedy,” said Marco Elser, a Rome-based partner at Lonsin Capital Ltd., a British investment firm. “Monte Paschi survived the Inquisition, the unification of Italy, fascism and two world wars. But it couldn’t survive the mismanagement and corruption of bankers and politicians in the 21st century.””

  7. Arthur Says:

    Druckenmiller taught me never, ever invest in the present. You have to visualize the situation 18 months from now. How do you see the world in 2019. Thoughts? Future post? Best

    • Chicken Says:

      I predict Trump will be pres and the sun will still come up in the morning.

      Maybe the cold war will have been avoided.
      EU will be on the precipice of breakup, a perpetual process providing constant flow of milk until the cow falls over dead.

  8. David Richards (@djwrichards) Says:

    First-time poster but long-time lurker. Season’s greetings from Asia.
    Mr. Harris, you have followers around the world. Greatly appreciated!

    • Yra G Harris Says:

      David–thanks for the update and please add constructive posts to the blog to keep it relevant—unlike Amerikan colleges and universities—I seek discourse and not validation

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