Notes From Underground: Angela Merkel Finally Faces Facts

Angie Angie

where will it lead us from here

Oh, Angie don’t you wish

Oh your kisses still taste sweet

I hate that sadness in your eyes, but Angie Angie

Ain’t it time we said goodbye  [Richards and Jagger]
Today, German Chancellor Angela Merkel openly admitted that the German trade surplus was large because the ECB‘s monetary policy rendered the EURO to a bout of severe weakness, which helped make “German products cheaper.” It continually amazes me how forthright politicians become once the political storm clouds have lifted. When President Trump noted a similar view he was criticized for trying to force a break-up of the European Union. What was Angie’s angle in challenging the policies of the ECB and Mario Draghi? As I have written for the last six months, the ECB was going to become an issue in the upcoming German national elections. It appears that the Chancellor is getting ahead of the AfD and other challengers about the negative impact of Draghi’s policies that punish and financially repress German savers.

For several months I have warned against being LONG DOLLARS and SHORT EUROS after the French elections as a EURO RALLY would benefit Frau Merkel as she headed into the election. It has been the task of Finance Minister Schaeuble to attack President Draghi while Merkel remained silent. Merkel’s statement today reflects a change in tactics with four months until the German elections. Last week’s CDU victory in North Rhine-Westphalia was a huge upset as the Social Democrats had governed the state for 46 of the past 51 years. The Chancellor has a political tailwind in which she may hope to garner and absolute Parliamentary majority and rule without a coalition. This is, of course conjecture, outside conventional wisdom but if ANGIE can successfully attack the ECB she can say goodbye to the SPD and the Free Democrats. Also, a Merkel attack on the ECB may retrieve some disenchanted voters from the AfD. It seems that the Chancellor is in the arms of two Italians: Mario Draghi and Niccolo Machiavelli. As Mick Jagger would sing: “Angie your kisses still taste sweet.”

***In response to Merkel’s comments on the EURO, the overnight strength in the reversed and the DOLLAR retreated below last week’s lows and it now looks determined to test the lows of the night of Trump’s election victory (95.88). More importantly, the DOLLAR closed today below the November 7 low of 97.22, which was the low when Hillary was projected to be the next president. It’s also interesting that the Mexican peso is back to the November 7 levels, so developed and emerging markets seem to be in close coordination. The equity markets reflect a different outlook. Stocks rallied as there was no damaging Trump news over the weekend and the president has stuck to his teleprompter on his trip abroad.

The German stock market failed to rally as it seems the DAX is now beginning to suffer a NIKKEI malady: it struggles when the EURO currency rallies. We will watch this closely but if MERKEL is correct and the euro is TOO WEAK for the German economy then the DAX OUGHT to have room to outperform other developed equity markets. Again, negative interest rates, rising inflation and a weak currency provide the perfect storm for flows into German assets.

***The yield curve flattened dramatically last Wednesday when it seemed like the COMEY affair was going to create a very serious selloff in the global equity markets. But while stocks have re-established their rally and approached the May 16 close of 2397.50 in the S&Ps, long-term yields on U.S Treasuries have remained BID and the 2/10 yield curve remains 10 basis points FLATTER. This may be consequential as a barometer of an economy performing below expectations in the anticipation of a high probability of another FED RATE INCREASE at the June 13-14 FOMC meeting.

While some are shouting that the curve is FLATTENING, I advise being patient and see if the curve holds above its July 8, 2016 low of 74.89. If the curve flattens below that level on a WEEKLY close it will signal that the FED is misreading potentially misreading signs of strength in the economy. Yes, the ECB and BOJ are certainly distorting global bond markets through the continued purchasing of large-scale assets but I will be aware of a potential change in the global financial environment. It may soon be the time to SAY GOODBYE.

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15 Responses to “Notes From Underground: Angela Merkel Finally Faces Facts”

  1. Pierre Chapuis Says:

    Explain it to me like I was a 12 year old. I see the yield curve flatten out, I sell ALL equities?
    U.S., emerging markets and international?
    Hold cash or bonds?
    You guys rock, thanks for the updates!!

    • yra Says:

      Pierre –thanks for the reply and we will dig deeper some time this week but the questions are of course very relevant

  2. David Richards (@djwrichards) Says:

    Great foresight from December about the Euro for 2017. Looking ahead about half a year to 2018, we can see this is when the EU Sov Debt crisis begins to erupt “bigly” and many more EU banks begin to fail, especially the SIFI’s with their huge holdings of “risk free” sov bonds from EU nations that are sure to default. The numbers are now so bad that it’ll take only a stiff breeze to knock over the EU financial system and probably sweep away the Euro with it. Coming soon to a video stream near you. The smart money is apparently selling this (temporary) euro strength, not buying it, as the extreme positioning of the last COT shows.

    • yra Says:

      David—thank you and a very good reply but how long this plays out will depend on the rhetoric from ECB hawks and members of Merkel’s CDU cabinet members.Yes the risk weightings of the european domestic bank portfolios are a joke because all sovereign debt carries a zero risk weighting–so crap piles on top of crap making Draghi the ultimate gatekeeper–the entire global financial system is becoming dependent on the German credit card

      • David Richards (@djwrichards) Says:

        Even if the ECB “prints” on behalf of sovereigns to “pay” their debt or to buy bad sov debt from the banks, there are huge piles of NPLs on the books of some major banks in the Eurozone. A rising euro is just a reaction, a trade and an opportunity to set up the next Big Short.

        Technically, Euro has possibly just completed a 3rd wave in EW speak, Watch for a shallow Euro pullback (4th wave) before an assault in wave 5 on last year’s high of 1.16. That level would complete a “flat correction”, before the start of the next big bear leg in Euro, probably later this year or by 2018 at latest. Doesn’t matter what happens with Trump or Draghi or Merkel & Macron because the math is already cooked in the books. In fact, one might argue the election of Macron and Merkel guarantees the EU will fail as the status quo gets reinforced with no hope for any real reform in Brussels and the troika. European debt & monetary crisis dead ahead.

      • Yra Says:

        David–I have no problem with your technical analysis.Having been taught by the world’s best technician I hold your analysis in high regard but my analysis begins with the fundamentals and trading action is determined by technicals to secure the best probability of profit with the least amount of risk—1.16 may be the level which i do not challenge—that would be close to the level the german D-Mark was on the launch of the Euro currency on January 1999—presently the synthetic D-Mark is 1.7500/per dollar

  3. Rob Syp Says:

    laughing, who’s the world’s best technician?

    • Yra Says:

      Rob—his initials are H.G. and that is enough said although I know other very good technicians and some are blog readers as one of the others we will call Shrimp Walk

      • Rob Syp Says:

        thank you mr. harris that’s why i asked laughing shrimp walk is a classic… laughter is the only way to get through any of this.

    • David Richards (@djwrichards) Says:

      I think he is referring to Bob Prechter.

      But IMO the best technicians are really the guys who first mined bitcoin for 0.003 cents per bitcoin now worth $2200 each. LOL

      Technically, the dollar may or may not have completed a long cycle on January 3 that began in 2011. Even in TA they don’t ring a bell at the top.

      Economists say the fair market value of EUR/USD is1.20+ and thus it’s fundamentally undervalued, which is possibly true, but fundamentals confuse me because how do they account for the value of a structurally flawed currency like Euro with no common bond market and taxing authority to back it?

      • Yra Says:

        David–my first answer to the value of the Euro is that currencies are always a relative value relationship.Yes I know full well about purchasing power parity and the Big Mac index but those are for the billions sold to comprehend.Currencies are difficult to trade because the variables driving them are dynamic and based on flows as well as interest rate differentials,trade figures,inflation created real yields and of course geo-political events.It took Brexit to push the POUND low enough to have an impact of creating a current account deficit that would have to be dealt with at some point–the pound dropping to 1.20 helped to expedite the correction of a severe imbalance—now about Germany,China,Japan and of course Italy and several other imbalances in european countries that do not control their currencies.

  4. Arthur Says:

    Yra, great post… meanwhile, “Eurozone economic recovery gathers pace” https://www.ft.com/content/ce3e99f0-3fa4-11e7-82b6-896b95f30f58#comments

  5. Arthur Says:

    By the way, very interesting reading “A Primer on the Euro Breakup: Depart, Default, and Devalue as the Optimal Solution
    https://ftalphaville-cdn.ft.com/wp-content/uploads/2012/07/A-Primer-on-the-Euro-Breakup-FINAL-VP-Version.pdf

    • Yra Says:

      Arthur–having read the Rotten Heart of Europe this paper is no surprise and I plead with all blog readers to purchase their copies of the Rotten Heart—last week Chris Whalen cited the ROHE in his paper on Britain—the ROHE is the best book on Europe in the last 100 years–a must read for understanding the political and financial landscape that will be the backdrop for financial problems for the next four years–send me an email @ Rottenheartofeurope@gmail .com and I will mail a copy with a bill for $8.00 plus shipping–

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