Notes From Underground: Klaatu Barada Nikto (Stop The Printing Presses!)

In this famous science fiction phrase from the movie “The Day the Earth Stood Still,” I extract my own meaning: Stop the printing before the world’s financial system is destroyed. Sci-fi writer Edmund North never deciphered the English translation of this “alien” phrase but I believe my interpretation applies to these tumultuous times in central banking. The ROBOT GORT is prevented from destroying the world when the words are spoken to him. Thus I say to Mario Draghi: “Mario Barada Nikto.” The continued use of large-scale asset purchases to enhance global liquidity in a period of increased economic growth is preventing the markets from stabilizing. The proof is in the continued mispricing of corporate debt. Last week, the BBB-rated French firm Veolia sold 500 million euros of three-year notes for -0.026%. Yes, a mediocre credit was able to borrow at less than zero. This is the insanity of the financial world to which the central banks continue to provide liquidity.

Corporations are able to borrow for stock buybacks and increased dividends but creditors are accumulating assets based on risk premiums established by central banks’ QE programs and are causing massive distortions in the credit markets. Central bank policies initially prevented a liquidation of global assets and a world depression, but its robotic response to keep the presses rolling is causing a dangerous crushing of risk premiums. Also, the financial repression has resulted in even-greater wealth inequality as the world’s wealthy are much better situated to ride the tsunami of wave of central bank QE programs. The distortions caused by financial repression are being felt in the rise of fringe political parties appealing to the very visible outcomes of asset inflation caused by the endless infusions of liquidity. It seems Mario Barada Nikto is necessary for the Salvator Mundi.

As the weekend closes it seems that Chancellor Merkel has been unable to form a coalition government with disagreements over immigration policy as the major sticking point. The Green Party wants assurances that German immigrants will be allowed to reunite with family members while also keeping immigration numbers higher than those put forward by Merkel’s sister party, the CSU. It seems that Chancellor Merkel may have to find support from her previous grand coalition partner, the SPD — which is doubtful — govern with a minority coalition, or create a new snap election. Many establishment politicians are fearful of a new election for they fear that the AfD (fringe right) will acquire more seats as Angela Merkel is seen as weak. The FDP party has been quiet as it waits to see how the process proceeds. The FDP seems content to be happy to bargain for the finance ministry post under the guidance of party leader, Christian Lindner.

Tonight the rumors are flying about the coalition talks having broken down and that Merkel is going to try and woo the Social Democrats into a new grand coalition. The EURO is under pressure in response to the rumors. Regardless, Angela Merkel is diminished in the eyes of Europe but this does not raise the stature of French President Emmanuel Macron. Much has been made of Chancellor Merkel being an indomitable negotiator. (This has been true in her recent dealings with European leaders as Germany controls the purse strings.) The European nations have bent to German demands because of the fear of financial repercussions. But it is a different situation when negotiations are with the major creditors of the entire European project. Mario Draghi’s continued use of negative interest rates has financially repressed German savers and the end result is political resistance. The fact that the rise of political unease in the most vibrant European economy should be a warning signal to all investors. The DAX gave us an early warning signal but a constructive resolution to Merkel’s dilemma should provide relief.

***Friday resulted a break in market complacency. The precious metals broke out of its recent ranges for lack of any of ostensible reason. Gold had the early strength and silver was a later-day participant. Both precious metals closed above recent resistance and the silver finally closed above its 200-day moving average. Will it persist? I advise patience but it is certainly something to watch. The metals advanced came on a day when the economic data was positive, following an entire week of fairly strong economic news, couple with the House passage of a tax bill. Yet, the BONDS also put in a strong week, especially the long-end as the 2/10 and 5/30 curves continued to flatten. Even the U.S. dollar struggled to rally on good economic news causing sizable losses for established bullish dollar positions. There is divergence taking place as long-established correlations are breaking down.

The rise in the U.S. two-year yield to 1.72% has not been able to support the dollar or pressure the GOLD so I advise paying close attention to the GOLD/CURRENCY crosses, which may suggest global investors are tiring of the persistent interventions by the world’s central banks. Friday may have been a one-off session, but the power of the sustained rally needs to be respected, especially following the November 15 selloff when it was rumored that a 40,000 contract order broke the gold market $12.00 in a short time span. (There was evidently a large buyer that prevailed by Friday’s close.) This is just a table setting as we head into a holiday-shortened week.

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9 Responses to “Notes From Underground: Klaatu Barada Nikto (Stop The Printing Presses!)”

  1. Trader 1 Says:

    Yra,

    Draghi creating a backdoor Eurobond: Do u think when German Leaders talk negative about Draghi policies it’s just to appease voters but in reality they really want Draghi to create his Eurobond?
    (If Draghi does it leaders don’t have to ask German voters and they stay in power)

  2. Chicken Says:

    “Central bank policies initially prevented a liquidation of global assets and a world depression.”

    There were trillions of losses and gains that needed to be socialized and privatized, respectively.

    • yra harris Says:

      Chicken–we will disagree about this but that is what this is all about.The socialization of the risk necessitated the add of liquidity to prevent the mass liquidation which would have seen unemployment soar to levels the system couldn’t tolerate politically—-another bout of 20% unemployment would have been disastrous –but took place after QE 1 is an abomination and when Chuck Schumer said the FED was only game in town the FED should have curtailed all additional efforts–Bernanke ran in fear from the taper tantrum which was a major mistake even greater then Greenspan’s panic to bail out LTCM and all its creditors

  3. Asherz Says:

    Market interference by governments and financial institutions is now becoming widely recognized. Manipulation in the gold markets has been going on for decades when found to be necessary in order to retain the hegemony of the dollar and other fiat currencies. Many continue to disbelieve this “conspiracy theory.”
    The link below goes back to SecState Kissinger a few years after the Nixon break in convertibility of gold in foreign trade in 1971. This is only an early piece of evidence. JPM and bullion banks have been the tools of governments in this obliteration of free markets.
    Markets however ultimately will prove to be greater than those who attempt to stifle proper pricing.

    https://www.bullionstar.com/blogs/koos-jansen/minutes-of-kissinger-meeting-on-gold-1974/

    • yra Says:

      Asherz–thanks for posting this piece.I have read it a few times over the years but it is so important it needs to be read again—The Chinese have evidently studied it with great and grave concern.Throw in Putin and we have a battle for the bit coin of the realm

  4. Absurdities in today's markets - FatAlpha Says:

    […] Stop The Printing¬†Presses! by Yra Harris […]

  5. Ronald Ferrill Says:

    Asher – yes, a very interesting look back. From my perspective it is more interesting in it’s attitude than even the content. As usual, people who have been told that they are really smart, start to believe it and lose sight of what they don’t really know.

    It is simply amazing that we are still STILL discussing here and in other venues (even at my dining table!) the reasons, breadth, depth, probable, possible, unknown and unintended consequences of the ether-dropped currency around the world. What I am fairly certain of is that my working lifetime of saving (having started as a caddy at 11) will have been for naught when the reality bites. I recall when as a boy I could buy “Confederate currency” at pennies on the dollar. Wondering if we will have to buy “Monopoly” money at more than face value with U.S. Dollars (e.g. $1 monopoly costs $5 U.S.)?

  6. Sophocles Sophocleous Says:

    Great article. I quoted it and linked it in a post on my own site with similar thinking from Mauldin. https://fatalpha.com/absurdities-todays-markets/

  7. Financial Repression Authority Says:

    […] LINK HERE to the article […]

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