Notes From Underground: Did I Miss Anything?

There were myriad central bank meetings last week as the FED, ECB, BOE, SNB, Bank of Mexico and others rendezvoused. With the exception of the Fed, all maintained their current policies. (The U.S. FED raised rates, which was 99% baked in.) The ECB was as dovish (as expected) and President Draghi has a few new issues to confront as Italian elections are scheduled for March 4, 2018. The Italian situation is already impacting sovereign bonds as the Italian 10-year yield rose against the German and French equivalents. BUT I FULLY EXPECT FOR THE ECB TO BREAK THE CAPITAL KEY RULES BY PURCHASING MORE ITALIAN DEBT THAN ALLOWED. POLITICS WILL BE DRAGHI’S MAIN CONCERN.

The mainstream media equates ECB policy with FED and BOJ QE programs but I will keep stressing that the end game is different for ECB. President Draghi desires to build a balance sheet so large that IT NECESSITATES the consolidation into a EUROBOND. If you fail to comprehend this you are going to lose a great deal of money as this unfolds over the next two years. NOT ALL QE PROGRAMS ARE CREATED EQUAL! (Read the ROTTEN HEART OF EUROPE for a greater sense of what awaits the EU.) The stock markets in the U.S. continued to rally even as the Fed raised interest rates. The 2017 tax act continues to provide fuel for corporate profits. What continues to push this rally will be the key question for me.

Speaking of rally, where is the DOLLAR? As the ECB was dovish and the FOMC raised rates, the U.S. DOLLAR closed UNCHANGED on the week. The German DAX and EURO 50 Stoxx index closed lower on the week as negative political outcomes are creating some uncertainty for investors. This weekend it was revealed that the far-right Freedom Party in Austria has garnered three major ministries in the newly formed Government: defense, interior and foreign. This will put even more pressure on Chancellor Merkel to form another grand-coalition with the SPD in Germany. Merkel weakens everyday as it has been three months since the election and there is no new government in place. The SPD seems to demand more as they know Chancellor Merkel is DESPERATE to form a coalition. I discuss this in greater detail on the FRA podcast with Richard Bonugli. (We did a one-on-one after the Janet Yellen press conference.) Pour a scotch and enjoy. I’m back.

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16 Responses to “Notes From Underground: Did I Miss Anything?”

  1. asherz Says:

    Yra- “Draghi desires to build a balance sheet so large that IT NECESSITATES the consolidation into a EUROBOND.”

    Here is another example of necessity being the mother of invention. The Eurobond will assuredly make its debut as you have been saying as the alternative is a financial mushroom cloud.
    But we are left with the following conundrums (conundra?) With the Fed on a tightening roll and Draghi as dovish as can be, why is the dollar not stronger and approaching its 12 month highs instead of its lows? And with QT in process, with a 3.3% GDP growth, a stimulative tax bill about to be passed, with trillions of overseas dollars soon to be repatriated and injected into our economy, why is there a 2/10 spread of .53% leaving your .73.5 level for action in the dust- what is the market signaling?
    1) Pricing mechanisms are totally broken with CB interference
    2) The economy is soon to fall off the cliff
    3) Bitcoins and Da Vincis are telling us that Amsterdam in 1620 was comparatively rational and figuring out markets should be left to the denizens of Bellevue while we look to curl up with some good spy novels.
    Welcome back. (are you sure you want to be back?)

    • yra harris Says:

      Asherz—great summation and all I can do is dust off my copy of the Madness of Crowds by Charles Mac Kay–Extraordinary Popular Delusions –indeed

  2. Trader 1 Says:


    With Tax Cut Stimulus + 100% Cap Ex Expensing + Hurricane Rebuild + ~ 3% GDP etc. :

    Can you explain why there were 2 Dissents at last FED Meeting?? What am I missing?

    • yra harris Says:

      Trader—both dissents were from no voters next year.Evans just got in one last dove but Kashkari I believe is more political.I think he is playing for a Governor’s seat and his dovishishness plays well to Trump—I think Kashkari is very Machiavellian—-but just my opinion

  3. Richard Tonetti Says:

    Hi Yra,

    Dumb question for you and appreciate you taking the time to respond. I don’t always understand some of your notes so looking for clarification.

    Based on your Euro comments; it seems to me that you’re implying that Draghi will continue to build balance sheet which i believe means he will continue buying bonds; creating false demand which drives the Euro price higher into supply zones for a better short opportunity. Am I correct in my understanding?

    Thank you.



    • yra harris Says:

      Rick–I wish i could tell you that is why the Euro is going higher–actually the Euro should be lower based on widening interest rates differentiials between europe andd the U.S.–it is not false demand but market manipulation and believe me that Draghi wants a weaker Euro to aid the weaker EU economies–will try to answer this in a deeper fashion tonight or tomorrow

  4. The bigman Says:

    From the cheap seats,I wish to posit another reason for the dollar’s performance. Since markets are forward looking can it be that the greenback is starting to lose its reserve currency premium? Is the Saudi king visiting Russia for the first time the beginning of the end for the petrodollar? How about the BRIC agreements that allow transactions in BRIC currencies or gold backed yuan oil futures And then bitcoin? Is bit coin replacing the dollar as the preferred currency for money laundering?Perhaps the markets aren’t crazy when it comes to the dollar just better st reading the tea leaves

    • asherz Says:

      Bigman, you are on to something. After Nixon decoupled gold from convertibility with the dollar it left the dollar in danger of losing its unique status as the world’s reserve currency. An agreement was reached with Saudi Arabia by Nixon and Kissinger that all their oil sales would be paid in what became called the petrodollar, and the Saudis received some security assurances in return. Soon all of the OPEC members joined the petrodollar club, assuring worldwide demand for the greenback that had no metal backing. The petroyuan and petroruble are the leaks in the dike.
      I disagree that Bitcoin will become an acceptable currency. and there are several reasons for this, not least of which are the costs involved in transactions, and lack of immediacy in completing transactions. Historians will look back at this development the way Yra described Charles MacKay’s classic work on manias.

    • yra harris Says:

      Bigman–as Asherz points out you raise very valid issues to make the case why the U.S. Dollar is not reacting to monetary/fiscal policies in a traditional manner.As I discussed in the podcast this is certainly not the reaction function of the Reagan/Volcker policy.The petro dollar was one of the reasons I found my way to the realm of Austrian thinking—I had some great professors of the left political persuasion who were genuine teachers and wanted to examine events from many perspectives.

  5. arthur Says:

    Yra, your view on Net Neutrality? thanks

    • yra harris Says:

      Arthur–I don’t pretend to fully comprehend the nuances of this policy.But one thing I know is that once the biggest players utilize every regulation to better their position they all become rapid free marketers.Good regulation,a rarity,is important and my experience favors a light but effective touch.I once wound up in a very heated discussion with a major risk manager at a major investment bank while sitting on Brooksley Born’s FPAC –a professional advisory group to the CFTC Chair,The investment banker was in favor of rescinding a regulation that helped the futures pits–remember foreign currency trading in the the OTC market was non-regulated and still is—-the investment bank wanted to change the rules for futures customers so as to benefit the OTC which we have learned was heavily weighted against the clients—the 800 pound gorilla always wants less government once they have used every advantage to build their moat.Arthur ,let me state again–this are my views about the regulatory environment and its ability to provide advantage to some ,who then cry out for “free markets”-there is a great deal of nuance in this situation and I do not claim expertise in the realm of the FCC—bottom line in terms of economics is that the gorillas have financial heft.

  6. David Richards (@djwrichards) Says:

    As I’ve said before.. Dollar bear market, dudes. That’s why all the purely fundamental traders are scratching their heads when the dollar tumbles after a hawkish Fed and dovish ECB. What really happened is that EURUSD turned up from the trendline it has respected all year.

    The euro will continue to rise against the dollar into 1Q18 or 1H18, maybe making a marginal new cyclical high in the process. But euro is just a reactionary rally (counter to the primary trend), and it will fall hard afterwards. Just count the waves and watch the key levels: currently >1.21 on the upside and 1.155 on the downside.

    There is no alternative to the dollar as a reserve currency as there is no other large or trustworthy enough market in which institutional money will park especially in a crisis. Yes, the reserve currency and capitol of global finance will move (to China) but not for years yet.

    • yra harris Says:

      David–as usual a very thoughtful reply and puts forth the argument raised by the Mark Fields quote back in February where we discussed the meaning of Ford’s then CEO—“Currency Manipulation is the mother of all trade barriers—-it was the bottom in the Euro.Trump loves a weakened dollar and the market has responded for the past ten months–readers can go to NOTES FROM UNDERGROUND archives and read the piece published in real time.The National Association of Manufacturers [NAM] lobbies for a weak dollar —always

  7. Chicken Says:

    “President Draghi desires to build a balance sheet so large that IT NECESSITATES the consolidation into a EUROBOND.”

    That’s me, my comprehension of the implications is at best, weak.

    • yra harris Says:

      Chicken–what makes you think your comprehension is weak–I have read your responses for years and weakness is not a trait–what ails you?

      • Chicken Says:

        Ha, I’ve been patiently watching the euro rise, which isn’t as I anticipated.

        Thanks again for prodding your readers (including myself) in the right direction.

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