Notes From Underground: Missiles Over Hokkaido

First of all, no matter what analysis we do it always pales in light of the human suffering that natural disasters bring upon people around the world. I am fortunate to be in a dry room, with warm clothes, food and, of course, an internet connection. It is often said that water is far worse than wind when it comes to the impact of hurricanes and typhoons. The human misery that deals with 40 inches of rain in a three-day period makes our prayers go out to all those affected by the devastation. Stop and take an inventory of the blessings we have on a daily basis. Houston, we can hear you.

***In a Monday appearance on CNBC, Art Cashin cited the Notes From Underground post about Gary Cohn. I am always thankful when a person I hold in high regard takes the time to acknowledge some of the opinions I have shared about global macro finance. Here is the link to the CNBC piece. Art’s wisdom is so vast that when he comes on the screen I turn up the volume on my television. He is always interesting whether I agree with him or not as he will make you think about any calcified views a trader may hold. Thank you Art for your years of insightful market views. (Remember, it was Art Cashin who predicted last year the FED would be on hold for far longer than conventional wisdom suggested.)

***More theater from Kim Jong-un. I am not making light of the bombastic North Korean leader and his firing of an intercontinental missile over the northern Japanese Island of Hokkaido. Mr. Kim ramps up global tensions and if we analyze his behavior through the prism of the rational actor model the question becomes: WHAT DOES KIM want? The answer is we don’t know, but can conjecture he keeps wanting the world’s attention for some desired outcome. More food? More energy? Or acceptance by the nations of the world and thus to become part of the world of nations? The lack of a tweet from President Trump is a good thing for it is better to tone down the rhetoric in an effort to create an environment for multilateral talks in the future. Those who ramp up the rhetoric of military strikes in response to North Korean provocations are irresponsible for as I have written many times, unless you are willing to use TACTICAL NUCLEAR WEAPONS to wipe out North Korean retaliatory abilities, the devastation that will be directed at Seoul, South Korea is a non-starter.

Steve Bannon was correct when he offered this point in a recent interview. It is time to tone down the threats and use whatever channels are available to initiate an end to the 20 years of global drama promoted by the North Koreans. The market response to the BALLISTIC MISSILE that landed 800 miles east of Japan was typical. GOLD had an immediate rally but actually closed lower. The U.S. dollar was sold as this “unprecedented threat” was deemed to be a negative for Trump and its bellicose tendencies. By day’s end the DOLLAR closed higher as haven trades were swapped for a return to EQUITY buying. Global bond yields dropped in a race to the havens but dropped as fears calmed and the markets returned to analyzing the massive destruction visited upon a large, economically significant urban center.

The BULLISH sentiment was revived as Wall Street analysts were putting out the huge demand impact that would take place once the water recedes in Houston. More importantly (in my opinion), THE FED NOW HAS A NEW HEADWIND TO BE CONCERNED ABOUT FOR THE HOUSTON PORT STRUCTURE IS OF MAJOR IMPORTANCE FOR GLOBAL ENERGY SUPPLY AND DEMAND. The FOMC will look to Robert Kaplan of the Dallas Fed, who is a voting member, for guidance of measuring the impact on the Texas and the domestic economy.T he initial impact of the Houston disaster will be a drag on the U.S. economy with any stimulative effect to be felt in the medium term future. The HEADWIND will also provide cover for ECB President Draghi to keep the ECB from shrinking its balance sheet or removing negative interest rates.

The talk of a massive fiscal spending package for rebuilding HOUSTON ought to steepen the yield curve as the U.S. government will need to issue more Treasuries while the Fed will not raise the fed funds target range. Also, as Rick Santelli suggested, if the insurance claims number is large enough the insurers will be selling bonds to raise cash. The HEADWINDS FROM HARVEY will not subside for a while. The U.S. 2/10 curve flattened to 78.5 basis points in the rush for safety but by day’s end the curve was back to 81. In this environment it is good to stay trading rather than seeking investments. The DAX CLOSED UNDER ITS 200-DAY MOVING AVERAGE but after the late EURO selloff I will wait to see how the index performs tomorrow for confirmation of potential continued weakness in German equities. So, trade with patience.

***A question for consideration: Is Kim Jong-un trading for an account?  I only ask that because there appears a certain timing to the moments he chooses to raise the tension levels. Yesterday the announcement came at 4:03 p.m. CST, just after the market closed. When the markets reopened the headlines were in full play and the moves were immediately dynamic. Quant analysts could shed light on this but it is worth considering as to how the North Korean can support his extravagant lifestyle. The thought remains the same: 2+2=5 is also a beautiful thing.


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14 Responses to “Notes From Underground: Missiles Over Hokkaido”

  1. Philippa Dunne Says:


  2. Pierre Chapuis Says:

    According to Wikipedia this city was built on a swamp. The lives lost are a tragedy. I foresee a lot of people leaving and never coming back. From the pictures it looks like the water may be here to stay for awhile. Do you think there is a possibility that Houston doesn’t get rebuilt? I’m not on the ground there so I cannot have a good opinion.

  3. Mark T Says:

    We know what Kim wants. He wants to reunify Korea under his rule. The Kim family has always stated that to be their goal. To that end, he realizes he must have a credible nuclear threat to harm the US in order to deter the US from supporting S Korea. Once he achieves that goal, he will issue an ultimatum to the South to surrender or die. He’ll have nukes, they won’t.

    And if China says no, he’ll point his nukes at Beijing and Shanghai.

    That’s why it’s nonsense to talk about military options being unthinkable. With Kim, there are only military options.

    • yra harris Says:

      Mark T—you view is certainly interesting but from the many things I have read over the years I just don’t see where you derive this outcome.It is an outcome that cannot prevail and if China wants to destabilize the region further the Japanese will seek to enhance their defense–he will never point his nukes at China for that would be suicide on a national scale.Madness in the age of thermonuclear warfare is not new –see the 1957 schism in what the CIA believed was a monolithic communist block–

    • Arthur Says:

      The option is called “trategic patience”

  4. Richard H Papp Says:

    Everyone must read Asherz’s posting of the article on the Libor situation in Yra’s recent blog. In addition, the 6 month UST Monday auction of T-Bill has had the same price of 99.4363 for the last 3 weeks. Is there still an auction or is it the summer doldrums?

    • yra harris Says:

      Richard—I hope that Alexandra Harris at bloomberg will answer this question as she has been covering this issue for a while and is the most knowledgeable I know

    • Yra Says:

      Hi Richard, best to look at the high discount rate, not the price of the bill auctions. But in any case, Treasury has managed to sell 6m bills at the same discount rate of 1.115% for three straight weeks. If you look at a generic treasury bill curve (i.e. 1m/3m/6m/1Y), debt ceiling kinks aside, you’ll see that the front-end of the curve is very very flat. That’s a front-end pricing no Fed rate hikes.

      However, rates should probably be higher in anticipation of the deluge of supply that will hit the market once the debt ceiling is suspended or raised, and the Fed begins letting its reinvestments roll off as it’s expected Treasury will issue more bills to replace the paper.

  5. Chicken Says:

    The Swiss have precision timing! Assuming Yen have reached bottom, would this mean now is a great time to own Japanese assets?

  6. Arthur Says:

    Thomas Kaplan, another reason to own gold…

  7. Arthur Says:

    My pleasure!

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