Notes From Underground

Today, Rick Santelli and I offered insights into this week’s FOMC meeting, coupled with the recent ECB actions. I noted that the Italian BOND FUTURES Monday were trading above the June 27 close when ECB President Mario Draghi roiled global credit markets with his Sintra,Portugal speech, which suggested that the removal of a deflationary scare would allow the ECB to begin tapering its QE program. The fact that Italian 10-year yields are lower today than four weeks ago is indicative of the power of the QE bond purchases. Why?

Italy’s debt situation is concerning, even as some of the nonperforming bank loans have been offloaded to foreign investors and sovereign wealth funds. Nonperforming loans still comprise more than 15% of total loans. While special purpose vehicles (SPV) lighten the load for Italian lenders, the Italian state continues to increase its debt-to-GDP ratio. The massive Italian debt load is an issue that President Draghi well understands (especially, since he was the President of the Bank of Italy before the ECB.) If the ECB tapering is to begin in the AUTUMN (as some maintain) why would investors be chasing yields by buying what is certain to a losing position? THE QUESTION FOR NOTES FROM UNDERGROUND REMAINS: What is the mandate of the ECB?

My answer: It is neither inflation or growth. THE ECB’S MANDATE IS WHAT PRESIDENT DRAGHI ESTABLISHED IN THE SUMMER 2012: WHATEVER IT TAKES! The whatever means sustaining of the EURO currency and the entire EU project. If you accept that premise then the road to ending QE is found in the financial health of Italy and other peripheral countries. The 2012 European debt crisis was based on the enormous debt loads of the PIIGS: Portugal, Italy, Ireland, Greece, Spain. If that situation has been alleviated then the ECB can raise the flag of the inflation mandate. Until then ALL POWER TO THE SOVIET KNOWN AS THE ECB.

Number two on the main agenda of financial manure is the idea that countries’ monetary policies are not directed at weakening their currencies. Last week MNI wrote an article titled, “RBA Neutral Cash Rate Estimate May Be Too High.” According to the story, Reserve Bank of Australia Governor Philip Lowe wrote in December 2012: “Interest rates are lower than they otherwise would be to offset some of the effects of the uncomfortably high exchange rate.”

Markets have been bullish the Aussie dollar in anticipation of a rise in the RBA‘s cash rate but with the recent strength in the currency the central bank may curtail any future rate hikes even as its real estate market is robust. The July 4 meeting noted the concern about the Aussie dollar then at 0.7680. Today it is trading at 0.7924. I expect to hear the RBA officials jawbone the currency lower.

In another example of the currency manipulation as monetary policy, Monday Swiss National Bank Chairman Thomas Jordan said the Swiss Franc is still significantly overvalued; the SNB will therefore maintain its negative interest and intervention policy; and has leeway to maneuver on its balance sheet if needed. The SNB never shirk from currency intervention and yet the U.S. Treasury fails to label the Swiss a currency manipulator. The G-20 communiques are consistently anti-currency manipulation but yet we continually have many central banks proclaim that their monetary policies are heavily influenced by currency values. With so much intervention preventing market fundamentals from providing a genuine price seeking mechanism RISK PARITY AND VOL SELLING PROGRAMS make perfect sense. Time to put away my broom and shovel.

Click on the image to watch me and Rick discuss central bank policy.

Tags: CNBC, currency manipulation, ECB, Fed, Italian 10-year note, RBA, Rick Santelli, SNB

This entry was posted on July 24, 2017 at 7:19 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.