Notes From Underground: Elections In Japan, Czech Republic and Italy

First: On Oct. 18 I talked with Richard Bonugli from the Financial Repression Authority and financial analyst John Browne, a former member of the British Parliament. I am linking to the transcript of the chat. The conversation was free-flowing and was heavily tilted toward geopolitical concerns and shed light on investment possibilities. But as readers of NOTES well know, many of out best trade outcomes are based on political economy as well as mere yield curves. Last week the 2/10 did challenge the 73.5 basis point level (again) and by Friday the 2/10 had bounced back to 81 basis points.

The curve STEEPENED on the NEWS that the Trump team is confident of some tax package being passed before the end of the year. My concerns are will this be merely a TAX CUT instead of genuine TAX REFORM. Before any tax package sees the light of day, the Washington lobbyists will be taking an axe to issues it finds in contravention to their corporate interests. If true tax reform is to take place EVERY CONSTITUENCIES’ OX HAS TO BE GORED. If not, then it will be more nonsense with severe economic costs being borne by the middle-class taxpayer. Tax-cut euphoria drove the equity markets higher as investors have very little alternative to equity investments. As long as short-term U.S. interest rates maintain a negative real yield, the U.S. equity markets power ever higher. Read the FRA transcript and please ask questions as some of John Browne’s views should provoke high quality discourse.

***The election  in Japan provided Prime Minister Abe with an impressive victory. It appears that Abe will be able to reappoint BOJ Governor Kuroda to another term in 2018. It should be positive for the Nikkei index as interest rates remain low and QQE remains the order of the day. Last week’s statement from the Japan Post about allocating more money to equities and away from JGB’s should continue to provide strong support to Japanese equities, which have been on a sustained rally even as some foreign investors took profits ahead of the election.

The Czech Republic elected right-wing populist Andrej Babis, who received 30% of the vote and will be asked to form a government. Milan Nic of the German Council on Foreign Relations was quoted in a Financial Times article saying, “This is an earthquake. It’s a total revolt against the established parties and the mainstream. Since the 1990s I can’t recall elections that changed the political landscape so much.” The Czech election is interesting because it populist outcome is in a country experiencing healthy economic growth. Like the Austrian outcome there appears to be a backlash against the Brussels-established eurocratic elite.

As Macron seeks to push for a more harmonized fiscal Europe it appears that many electorates are pushing back against the centralization of risk without voter approval. As Otmar Issing warned, NO TAXATION WITHOUT REPRESENTATION. In a similar vote to Catalonia, two Italian regions were voting in non-binding referenda on autonomy from Rome. Lombardy and Veneto are both seeking to enhance their bargaining power with the central Italian government.

I haven’t seen results yet but this election is representative of individual states’ dissatisfaction with governments that are more concerned with policy in Brussels then with issues of regional and local concerns. This plays to the greater concern over President Macron’s calls for a centralized European budget and banking risk/regulatory mechanism. It is this threat that is causing ECB President Draghi to be in a rush to create the foundation for a EuroBOND.

***Chair Yellen gave a speech Friday night and staked out a powerful position for President Trump to reappoint her. Yellen said, “The probability that short-term interest rates may need to be reduced to their effective lower bound at some point is uncomfortably high, even in the absence of a major financial and economic crisis.” She sent Trump’s heart a “twitter” with this outlook: ” The bottom line is that we must recognize that our unconventional tools might have to be used again. If we are indeed living in a low-neutral rate world, a significantly less severe economic downturn than the Great recession might be sufficient to drive short-term interest rates back to their lower bound.” This is a powerful statement for Yellen to make. President Trump uses the stock market as a barometer of his success as President. A Fed Chair staking out this position should give the president great comfort. The threat of QE should be a stimulant to all asset classes. No taking away the punch bowl in this speech.


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13 Responses to “Notes From Underground: Elections In Japan, Czech Republic and Italy”

  1. Publius Says:

    Now Czech?—>

  2. Chicken Says:

    Excellent interview, really appreciate the frank discussion.

    If the world does begin trading in currencies alternative to the dollar, does that by definition reprice US equities?

    New world order with single crypto currency perhaps? Well, perhaps that’s a stretch. If nothing else, sounds volatile in the interim.

  3. GreenAB Says:

    Please allow me for some words regarding Italy.

    As with Catalonia – Veneto and Lombardy are all about MONEY. Both are rich regions who account for 30% of Italy´s economic output. As it´s the case with every rich region they are net payers. Now they just want more of their money for themselves and less for the poor South of the country.

    I understand, when sovereign nations don´t want that kind of financial transfers within the EU (lets say from Germany to Greece). But giving up solidarity WITHIN a country is a whole new level of egoism. And i can´t see anything good about that. The driving force behind this initiative is Lega Nord – a far right party.

    Over the weekend there was another interesting election.The Czech Republic voted for their own Trump. From the outside it looks irrational to me. The country has 3.5% growth, a budget surplus and the lowest unemployment rate in the EU. Last year they only took about 400 refugees (in a 10 million country). And still the Czech people see the need to punish “the elite”. Strange times…

    • yra harris Says:

      Green AB–I agree with your points but as Brussels is deemed to be far removed from local politics it seems voters want to punish the “elite” –this is what Bernard Connolly warned about two decades ago–the repressive nature of Brussels would create regionalism and tribalism—I think this explains some of what we are seeing.Your thoughts?

      • GreenAB Says:

        Yra, I haven´t read Bernard Conolly. Maybe you have a link for me?

        It´s hard to say if Brussels is responsible for these developments. The conflict over Catalonia has been brewing for a long time, dating back to 1714. I tend so say, that we would have seen the recent events regardless of Spains membership in the EU or not.

        And: Catalonia (if it where indepent) would like to stay in the European Union. The fact that Spain would veto this step is one of the reasons why they haven´t declared indepence yet.

        Same with the provinces in Italy – they want to keep more of their money from the central government. But there´s no discussion about leaving the EU.

        The Czechs on the other hands are a much different story. I would agree here, that the power of Brussels plays a role, especially in small, culutrally different countries in Eastern Europe (Hungary, Poland, Czech Rep.)

      • yra harris Says:

        Green AB–thanks for the comments.Very informative as usual and you of all must get a hold of the Rotten Heart of Europe.Yes,the wealthier regions of Europe would love to part of the German league but in the present EU set up very,very difficult and the ECJ will always do what is in the best ibterest of the EU

  4. Trader 1 Says:


    If Bitcoin existed during the financial crisis like it does today you could literally have a run on a bank in seconds.

    How will the USA handle this new cyrpto threat ?

    Outright ban or create a USA type crypto currency??

  5. Ronald Ferrill Says:

    Gotta love Otmar! He is so straight-forward and sees through even the darkest glass toward reality and truth. That said, and even though I am a proponent of “end of the Euro and ECB and the Brussels sprouts (rotten heart smells like), I can’t see them allowing the Euro to collapse. The established parties and in-power gang of EUhoodlums will pull out all stops to prevent it. For awhile anyway.

    • Yra Says:

      Ronald–hence Draghi’s rush too build the pile of debt to force the common Bond–bailout of the entire EU project by stealth.

  6. Margo Ranger Says:

    Draghi should be calling for a common tax policy and a common spending policy right along with common debt (his EuroBOND), shouldn’t he?

    • Yra Says:

      Margo–he would anger the Germans for entering into the realm of the fiscal policy and the howls from Germany,Netherlands,Austria would drown out the whirls of the printing press.

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