Notes From Underground

I use the wisdom of Simon and Garfunkel’s “Bookends” to discuss the huge risk that pervades the global financial system. This is not Yra crying wolf or pretending to be a prophet of doom. Notes From Underground deals with profit opportunities. It’s not a cult singing Barry McGuire’s, “Eve of Destruction.” I have not been banging the drum of impending financial disaster, but I have been consistent in noting that negative and zero interest rates, coupled with massive QE programs from the world’s central banks have lifted asset prices on a tsunami of liquidity.

Last week, the bond markets were very volatile in reaction to a Draghi statement, which hinted at a quicker removal of ECB QE programs. My thesis is (and has been) that the Draghi-led ECB is in a hurry to increase the ECB balance sheet in an effort to force the creation of a EUROBOND in a stealth effort to protect the heavily indebted-states like Italy, Greece, Spain, Ireland and others. The Germans have balked about fiscal harmonization before the strict Maastricht rules are adhered to in full measure. The Eurocrats in Brussels are using the ECB balance sheet as a tool to circumvent German concerns about being a wealth transfer agent for the profligate nations in an effort to forestall the implementation of needed labor and market reforms. Draghi’s “whatever it takes” program was not meant to respond to its mandate of inflation but rather to preserve the EU and its currency, the euro.

Recent Fed comments have not relied on economic DATA but appear to be targeted at confronting the tremendous increase in RISK as complacency has followed the large asset purchases of the global central banks. The QUESTION: IS THE FED TARGETING ECONOMIC DATA OR ASSETS PRICES? The recent slew of tepid economic releases has generated a view that the FED is more concerned with the high degree of financial risk that exists in the U.S. economy. IF, the Fed is targeting risk it will accept that any economic softness resulting from an attempt to reduce liquidity will be viewed as COLLATERAL DAMAGE.

Job growth has been strong enough and openings plentiful so that a cushion exists that will allow for the FED to try to decrease risk levels. IN MY OPINION: The Fed will attempt to reduce financial risk by reining in liquidity, but increase the RISK PARITY trade in the U.S. and global financial system, similar to the scenario that crushed Long Term Capital Management in September 1998. The supreme confidence of market participants in the FED “put” has resulted in massive positions based on the continued support of the world’s central banks. Whatever positions that have been accumulated by Bridgewater, AQR and others, the impact of these hedge fund giants has led to a magnification in risk as a multitude of other market participants have been sellers of volatility to mirror the serenity provided by the FED and risk parity players. “A TIME OF INNOCENCE, A TIME OF CONFIDENCE,” indeed.

***I am posting another PODCAST from FRA recorded Wednesday, June 28.I was on with Rick Santelli July 3 and will post that as soon as I receive the link. This week will bring the June jobs report and G-20 meeting from Hamburg, Germany. I will examine this later.

Tags: ECB, Fed, Mario Draghi, QE

This entry was posted on July 5, 2017 at 4:17 pm and is filed under Central Banks. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.