Notes From Underground:

(Click on the image to watch me and Rick discuss yield curves and central bankers.)

This Thanksgiving I was thankful to be able to discuss global finance with Rick. The theme is similar to much of what we have discussed over the last few years but the European situation is more difficult. As Rick and I discussed, the DOLLAR is interesting because the YIELD DIFFERENTIAL between the short-end of the curve favors the dollar as the spread between U.S. and German two-year yields is 250 basis points. Even Fed Governor Lael Brainard has noted that yield differentials on the short-end typically have a greater impact on relative values of foreign currencies. If you are long the EURO versus the U.S. dollar it is costing you almost 2.5% in interest earnings, yet after my interview with Rick, the EURO had a sizable rally versus many currencies on Friday.

What prompted this sudden move into the EURO? It appears that it was the news that German Chancellor Merkel had approached the SPD leader Martin Schulz with a proposition to reconstitute the Grand Coalition of the CDU/CSU/SPD. Several weeks earlier, Mr. Schulz was opposed to reentering a Grand Coalition and preferred to have the SPD be an opposition party. The question will be what compromises Merkel will have to make in order to entice Schulz to fall on his “proverbial sword.” If the Grand Coalition is reformed it will be deemed to be a positive for French President Macron and his ostensible plans at forming a “more perfect” European Union.

The SPD is in favor of more harmonization of the European banking system and possible fiscal policy. Mario Draghi will have a much smoother path to the creation of a EUROBOND with Merkel/Schulz/Macron providing a unified front. It appears that Chancellor Merkel and influential German financiers do not want to face a new election with the FDP and AfD turning the Macron propositions into a German election issue. There has been no resolution to Merkel’s offer as Schulz will squeeze hard to get as much of the SPD’s platform accepted as possible. By all measures, Chancellor Merkel is in a very weakened position. Keep this on our radar screens as we enter December.

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13 Responses to “Notes From Underground:”

  1. Asherz Says:

    At the end “harmonization ” will occur and a Eurobond will be created. We are way past the ability to have rational monetary policies and allowing the markets to punish the profligate sovereigns as they should have been long ago. Germany burghers will be forced to go along or take the guise of Samson pulling down the pillars. The Philistines will have won the battle while ultimately the war will be lost. There is no turning back any longer from the road of perdition that the central banking geniuses laid out for all of us beginning two decades ago.
    No one wants to say or hear doom and gloom but if there is a way out of this morass I’d love to hear it.

  2. GreenAB Says:

    “There has been no resolution to Merkel’s offer as Schulz will squeeze hard to get as much of the SPD’s platform accepted as possible.”

    That sums it up pretty well. I would still caution, that the chances for another grand coalition are 50-50 at best.

    Schulz had to give in to the Bundespresident (Steinmeier) who urged all parties to get their act together. Our official head of state is the one who has to decide about new elections and he is unwilling to allow this to happen. It would be a bad sign for our democracy if the parties would hand the results back to the voters. And: judging by the latest polls there won´t be a different outcome that would allow for another coalition.

    So the SPD had to show some responsibilty. They will at least hold talks with Merkel. But Schulz already made clear that any decision to enter a coalition will be made by the SPD members. And herein lies the problem. The party´s base is still very much opposed to the idea of another four years with Merkel. So if the CDU wants the SPD, they have to come up with something the SPD members can´t refuse. So far there are no signs for that to happen.

    But negotiations haven´t begun and there´s no timetable yet. Expectations are that a decision won´t come this year.

    • yra harris Says:

      Green AB–excellent,excellent post.I would advise all readers to pay attention to Green as although we sometimes differ in views his analysis as “boots on the ground” has been a very important part of this blog for over six years he has been commenting

  3. David Richards (@djwrichards) Says:

    Obviously something other than yield spreads is moving the dollar.
    Capital flows? Which are moved by sentiment and confidence?
    I mean confidence in government, which seems lacking for the US more than anywhere else at the moment.

    • Chicken Says:

      Or you might say, irredeemables are dragging down the status-quo.

    • wbuelow Says:

      EUR, JPY, CAD, AUD, NZL. All currecies that are undervalued on a PPP-adjusted basis and whose governments are running fiscal surpluses. Dollar will weaken for years to come.

      • yra harris Says:

        William–patience as those are very long term fundamentals where interest rate differentials and growth prospects will determine short -term flows

  4. Chicken Says:

    Always skating ahead of the puck, thanks Yra!

  5. Chicken Says:

    As the yield curve snakes and churns…

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