Notes From Underground: Au Revoir, Marine Le Pen

Now we can finally put the French elections behind us as its citizens maintained the status quo and elected Emmanuel Macron to a five-year term. Parliamentary elections follow in June but the two main parties, Socialists and Republicans, aren’t expected to face challenges. But, if the more conservative Republicans gain control of the Parliament and the prime minister post it will force Macron to move further to the right-center. If Macron moves away from the Hollande Socialist camp it will result in political protests from the Left. Macron will experience a difficult presidential term if the government is gridlocked by continual demonstrations. The German chancellor is going to ask a great deal from Macron: fiscal austerity, as well as a restructuring of the French domestic economy.

The market is anticipating a smooth path for a renewal of the German/French partnership, but with German elections taking place in September Chancellor Merkel will not want to be judged as accommodating the fiscal easiness of the French and other EU nations. While the market will now be less concerned with the French economic issues, the Italian debt situation weighs heavy on all the debt-plagued southern EU nations. The global markets have been lulled into an eerie calm–think Minsky—as the recent Dutch and French elections have driven the anti-euro populists back underground. I caution that the economic situation still remains a very serious concern as  President Draghi continues to build the ECB balance sheet in an effort to bail-out the fiscally weak states of Italy, Spain, Portugal, France and others. Italy is still a major concern as the non-performing loans plague its domestic banks. Add in that Italy has a debt-to-GDP ratio of 136% and it will take the entire EU to backstop the Italian financial system. I WARN ALL READERS THAT THE GLOBAL DEBT SITUATION IS FAR MORE PERILOUS THAN GLOBAL EQUITY MARKETS REFLECT.

Yes, as Keynes so wonderfully stated: “Markets can remain irrational far longer then you can remain solvent.” The world’s central banks have been busy adding liquidity to the financial system, which provides the backdrop for a Minsky Moment for complacency in the realm of ZIRP creates instability below the surface. We do not fight markets and therefore have not been sellers of equity markets by battling the power of central bank liquidity creation. But as geopolitics calm markets will return to focus on the fragile financial situation created by mountains of debt.

***This weekend, ZeroHedge posted an article with a familiar theme to readers of Notes From Underground: “Mystery Central Bank Buyer Revealed, Goes On Q1 Buying Spree.” ZeroHedge sets up a straw man by inferring that the central bank in question is the Bank of Japan, but as the article makes clear, it’s pointing to the Swiss National Bank as the culprit because it creates money out of “thin air” and buys the equity of real corporations such as APPLE. Last month the SNB added $13 billion to its foreign reserves, much of it in stock, according to SNB data. This is the classic example of how the world’s central banks have so badly distorted global equity and bond markets. The problem remains that these overseers of global markets have unrestricted control of the world’s monetary printing presses so the mystery of alchemy has been solved. In today’s currency trading the Swiss franc was the weakest as European investors breathed a sigh of relief and seemed to unload a portion of the Swiss currency they used as a haven.

The euro/Swiss cross traded above its pre-Trump victory day high of 1.0900. This now becomes an important barometer to measure if the SNB is disavowing more intervention as political calm settles on the Continent. If so, ZeroHedge’s argument will become moot and a large regular buyer of global equities will move just cash its dividend checks. This Swiss cross is put onto our radar screen, yet again. Especially as SNB Chairman Thomas Jordan has been constantly reminding markets that the Swiss franc is well overvalued. Maybe the Swiss will start to liquidate some equity–not a chance–but pay attention for the SNB to become ever more aggressive in a new sustained effort to weaken the Swiss franc against the euro.

***Where are the WAGE GAINS IN THE U.S.? The FED still relies on NAIRU to model the impact of wages on inflation but this model may belong in the trash bin. The Phillips Curve/NAIRU is remnant of the 1970s when the effects of globalization–both capital flows and labor competition–were beginning to be realized. In a world of free-flowing money and less trade protection, private sector unions have seen there negotiating power wane. The German economic juggernaut was built upon a massive labor restructuring in which the powerful German unions accepted less pay for job security (Hartz IV under Schroeder). The Fed keeps commenting on the low jobless rate leading to wage inflation but the constant low productivity combined with a global monetary/labor system keeps a cap on wage gains.

Excess capacity in China keeps prices and wages low around the globe. Just think the Fed is using the Maginot Line Defense during the times of ICBMS. This is an important consideration as the FED may have to reconsider its path of the next seven interest rate increases. If this has any credibility the yield curves OUGHT to flatten even as the FOMC raises the possibility of shrinking its balance sheet. In a time of SOMA selling debt the curve OUGHT to steepen as the market raises ahead of the FED on the long end. Unless the FED is wrong for tightening too quickly. This is our conundrum going forward.

***Heads up: I will be on with Rick Santelli tomorrow at 9:40 a.m.


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13 Responses to “Notes From Underground: Au Revoir, Marine Le Pen”

  1. Trader 1 Says:


    I understand your concern for EU debt. WIth that backdrop is it still your thesis now that French elections are over Draghi will start raising interest rates to help Merkle in the German Elections this fall?

    • yra Says:

      Trader—that is a question I am pondering yet again—I keep thinking that the ECB will move rates back to zero but of course keep the QE program at 60 billion a month to the year end and then maybe longer depending on when the Fed determines a policy on its balance sheet.This is definitely the issue facing the markets but yours is the key for the ECB and yes going back to zero means a rate rise.Merkel’s CDU party is on the record as being opposed to massive fiscal stimulus in violation of the Maastricht agreement—at least until after the election.

  2. silverbug2155 Says:

    Sometimes I wonder if the ever brewing geopolitics is done intentionally to some degree. Mainly to the hide the fiscal sins of these lunatics in Govt. Today Bullard and Mester come out saying that policy goals have been met.Hmmm.

  3. Asherz Says:

    Your warnings in bold letters that the equity markets are not reflecting dangerous global debt levels is right on. Wall Street’s fear gauge, the VIX is at a 24 year low. The markets are climbing a wall of complacency.
    Irving Fisher famously said on October 21 1929 that the markets had reached a permanently high plateau.
    QEs are the answer to keep markets backstopped. The SNB BOJ BOE and the Fed have discovered the true alchemy. And if not, everyone wii jump off the momentum locomotive in time. Russian roulette is a fun game.

  4. Trader 1 Says:


    Thanks for your answer. I also asked the question with some of these EU Banks attempting to build Huge H&S Bottoms ( CS, UBS, DB, etc )….IF these H&S Bottom Patterns compelete and hold I cant figure out what they are trying to price in (higher rates) or out (no EU debt crisis ) or both…….. ???

    • yra Says:

      Schaeuble just out saying normalization of ECB rates to start soon—nonsense but the germans are a serious backlash to the ECB and of course fiscal stimulus

  5. Ronald Ferrill Says:

    I always seem to find a kindred spirit with Asherz on markets. Where I’ve been wrong is that the central banks have a much larger magazine than a six-shooter for their programs. And, is there any likely-hood that magazine comes around to the loaded one, or are they able to keep adding more chambers to it with debt.

    Laugh at me. Made a bet in early Sep 2016that VIX would rise significantly in late 2016 or early 2017… That roulette table took the money with glee.

    • yra Says:

      Ron–thanks for your continued response and the dialogue you and others provide adds greatly to the effort of pulling things out of my mind—again thanks and the VIX has just been another variable crushed by the central banks—for a brief moment in time—but remember well the words of Bernanke —the subprime problem is contained

  6. ShockedToFindGambling Says:

    Yra, in 2008 there was about $2 Trillion of grossly over priced debt (CDOs). Now my guess is there is probably $50 Trillion (most sovereign and corporate debt)……..can’t levitate forever.

  7. David Richards (@djwrichards) Says:

    Wake up, everyone! The release valve from China and all the serially-devalued CB currencies is CRYPTO CURRENCY. China overtook the US as world’s largest economy in 2014, and with the crypto move, the Chinese have have leapfrogged USA as having the most total wealth in the world. Well played, “communists”!

  8. David Richards (@djwrichards) Says:

    Also, check out India Stack. The East is leaving the West in the dust.

  9. Financial Repression Authority Says:

    […] LINK HERE to Yra’s related blog post […]

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