Notes From Underground: Things That Go Trump In the Night

Please Donald, will the POTUS STFU, PLEASE. This is not a political statement. It is free advice because the more you communicate the less impact you will have. You may be trying to use the bully pulpit to jawbone the DOLLAR lower but every tweet diminishes your influence. Peter Navarro tried to create a weaker dollar but you have lessened the impact of his misinformed missives. Historically, jawboning has had a short-term market effect, but your late-night 140 character references are losing the power to persuade. You must learn that words are like your campaign sexual references, less is more. SO PLEASE, STFU.

1. Gold has rallied even as the equity markets have sustained the Trump theme of less regulations, promised infrastructure spending and an overhaul of the stifling U.S. tax code. It is important to note that GOLD has performed very well on a relative basis as the GOLD/YUAN, GOLD/EURO, GOLD/YEN have risen above their 200-day moving averages. The GOLD/YUAN today. The GOLD/DOLLAR and GOLD/SWISS have not yet surpassed the 200-day. But when they all sync up it will be a sign of continuing gold strength. As real yields remain negative around the globe and central banks seem fearful of raising rates, global investors seem to want some protection from the guardians of fiat currencies. Europeans are fearful of a bank BAIL-IN in which large depositors are forced to relinquish their savings and become creditors in case of a restructuring.

Today, the Reserve Bank of New Zealand (RBNZ) held the OCR rate steady as it cited: “The exchange rate remains higher than is sustainable for balanced growth and together with low global inflation continues to generate negative inflation in the tradables sector. A decline in the exchange rate is needed.” See, central banks know how to jawbone a currency but the sense that everybody wants a lower currency keeps GOLD as a store of value. The GOLD is well below the GOLD/KIWI 200-day so Governor Graeme Wheeler believes the KIWI is far too strong on a relative basis.

2. The German government had a 10-year note auction Wednesday and in the realm of Rick Santelli I would grade it an A+. German sovereign debt actually drew a lower yield than the previous auction, which makes it the exception in Europe as Spain, Italy and France all had to pay higher yields to attract buyers. More importantly, the auction’s bid-to-cover ratio was 2.15, the largest since March 2015. There is demand for high-quality government assets. As I forewarned on Monday, ITALIAN, FRENCH AND GERMAN bond futures rallied for the second day as the ECB was in buying bonds to meet its QE requirements. At one point, Italian and French yields were ACTUALLY  HIGHER as investors wanted to liquidate, hedge or actually short the lower-quality paper.

Today, the Financial Times had a very important article on the European sovereign debt market, titled, “Euro Redenomination Risk Edges On To Investors’ Radar.” In 2011-2012, I referenced the fabulous legal work of Lee Buchheit of Cleary Gottlieb for his work on sovereign debt restructurings in reference to Greece. But now fears are growing about all the credit-stressed nations of Europe and the valuations of bonds that have been issued. There were no concern about British bonds following BREXIT because British debt was denominated in POUNDS. But as the article stated, “The advance of anti-euro politicians is prompting some eurozone investors to do something they have not felt the need to do for several years:pay close attention to the fine print of bond documents. Different bonds have covenants that may allow a state to redenominate an Italian bond from being paid in Euros to having accept LIRA, which would mean accepting a significantly weaker currency resulting in a severe haircut on the bond’s value.”

See, not all debt deserves a ZERO RISK WEIGHTING! The article said “although eurozone government debt sold since January 2013 cannot be redenominated without bondholder approval, more than half the current 7 trillion of euro in outstanding debt does not carry this safeguard clause.” Many of the newer issued bonds have what are called collective action clauses (CAC), which require a supermajority of bondholders to agree to any sizable haircut. (See the Argentinian bond battle with Elliot Investors to get a quick primer on this significant issue for global debt restructurings.)

Georgetown University law professor Anna Gelpern maintains that even with these CACs “if a country decides to leave the only question is whether you get a haircut with scissors or with a chainsaw.” Also, because the CACs are governed by local laws the sovereign borrower could still unilaterally change the rules resulting in sizable losses for global and domestic investors. Argentina defaulted on $80 billion of debt. The total amount involved with an Italian and French redenomination would be approximately 4.2 trillion euros, much of it owned by European domestic banks, insurance companies and pension plans. Hyman Minsky, you are wanted on the telephone.

3. There is a revealing  chart of unease in Europe. It is the amount of overnight deposits at the ECB (tip of the cap to my progeny Alexandra Gerjoi). Last night, financial institutions deposited 482 billion euros at the ECB paying forty basis points for the privilege, the highest amount since July 2012. (Remember the ECB’s deposit rate is negative 40 basis points.) The German and French European repo rates are steady because financial institutions are skeptical of certain collateral so it is far safer to place cash with the ECB. We know they have a printing press. The more high-quality sovereign debt the ECB purchases, the more restrained the repo market becomes. The ECB is the repository of last resort (not the intentions of Walter Bagehot). Central banks were to be the lenders of last resort. Turmoil in the debt markets, with higher equity markets … I am awaiting a tweet from Professor Minsky.

ECB Overnight Deposits


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13 Responses to “Notes From Underground: Things That Go Trump In the Night”

  1. kevinwaspi Says:

    ECB in an alternative universe: Create more reserves by more bond purchases which all get deposited by the bond sellers fearful of the collateral in repos, such that the 40bps charge on deposits generates enough income at the ECB to rebate to the sovereign borrowers which is used to refund their onerous outstanding debt. Sounds like the perpetual motion machine, doesn’t it? Therefore, 2+2 = 5

    • AJ Says:

      Professor Waspi-

      If I understand you correctly, sovereigns such as Italy are depositing their bond sale proceeds with the ECB @ negative rates because they are afraid of themselves and others defaulting so it’s the lesser of all evils as far as depositories?

      The negative rate premium Italy pays is then used by the ECB to buy more of Italy’s debt to help them service the debt they just previously borrowed? That’s a bit like multiplying by a negative exponent isn’t it?

      Sounds like Ozzy Osbourne’s – Crazy Train was a presage about macro markets.

    • Dan DeRose Jr Says:

      Professor Waspi, maybe they have finally stripped the bolt of QE! What ‘worked in theory but not in practice’ was just a duration swap with market participants hungry for duration. Now that duration risk has been deemed returnless risk, their appetite has diminished!

  2. asherz Says:

    Yra- You cite Argentina as an example of how changing the rules imperils investors assumptions on the safety of their security holdings. Another instance was much closer to home. Remember the Chrysler bailout where bondholders got the shaft in favor of the labor unions? In times of severe stress all rules go out the window.

    As to your Trump STFU comment, I agree that there has been too much lip from the hip. But I fail to see the difference between a Navarro comment and the RBNZ remark. Manipulation of currencies has gone on for a long time, whether by tweet, printing press or central bank chairmen obscured comments.

    Pointing out the turmoil now going on underneath the hood in the debt markets while equities are at all time highs, is on target. We have seen that movie before, and the precious metals market is the canary in the coal mine.

    • yra Says:

      Asherz—thanks for the post.You are dead right on the RBNZ and Navarro except that Navarro was dead wrong on his analysis of the Euro.The Kiwi and the Swiss Franc all lend credibility to Trump and the value of currency as both practice active currency manipulation-however,in my opinion it is more then scale it is still the situation of the U.S. serving as the world’s reserve currency.But the hypocrisy of the world never fails to impress me.The lazy media should stop sitting at the white house and actually do some research to make these points in the press—world is never in balance and nothing is as it seems.

  3. Arthur Says:

    Food for thought. Trump’s Conventional Foreign Policy by George Friedman

    • yra Says:

      Arthur–thanks for the post but for Stratfor this is a calm piece and admits to what we preach here—We’ll see

  4. Blacklisted Says:

    Not even a mute and twitterless Trump can put the EU back together again, thus the destructive rise of the dollar will continue. So, let the wars by politicians begin, fanned by the presstitute media and Utopian sheeple.

  5. kevinwaspi Says:

    I said what i said somewhat tongue-in-cheek, but aside from the attempt at sick humor, the tail does seem to be wagging the dog on the functional operations of central banks who remit “profits” to respective sovereigns, from their “earnings” of their operations. In the case of charging depositors (banks) on the required overnight reserves, I guess I’d have to call it just another example of financial repression of “savers” subsidizing the over-indebted, and in this element, the over-indebted sovereign issuer.

  6. asherz Says:

    You’ve been slamming Navarro’s analysis on Germany’s taking advantage of a weak euro. Can this be why Merkel & keeping Greece and other peripherals afloat? I’ve thought he was on target rather than France being the prime beneficiary as you stated. See below.

    • yra Says:

      Asherz–I believe they are keeping Greece afloat because it is the taxpayers who have guaranteed the most of the bailout which merely paid the banks out and had the government’s take on the risk———Navarro was wrong because the German’s don’t want a weaker currency at this point but they have been outmaneuvered by Sarkozy and got saddled with the sly fox Draghi who is using the QE program to trap the Germans to be the creditor of all the debt stressed countries—and I will not change that view until proven otherwise.If Greek debt is repudiated then the hit to Merkel and the other nations facing election will be handily defeated and the greeks know the strength of their hand and are playing it

  7. asherz Says:

    Yra- You are absolutely right about Greek debt staying afloat to prevent a haircut (or should we call it a scalping) on German’s “investments” in that forlorn holding. And you are also correct in describing marvelous Mario trapping the Germans in a can’t- abandon- ship situation. (You know the old joke that if I owe the bank $10,000 they own me. But if I owe them $10,000,000,000 I own them.) But generating 253 Billion Euro surplus ain’t hay, and keeps their employment, economy, savings humming and the beer flowing. And I maintain that a weak Euro had something to do with that surplus, while the other reasons are not exclusionary. That’s why I thought Navarro was right on this call.

  8. A.M. Look 2/9/17 | Says:

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