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.