Notes From Underground: Some Issues to Contemplate

On Tuesday, Rick Santelli and I spoke, and, as usual it was way too short as we couldn’t cover anything in the depth we would’ve liked. Regardless, it allows us to get out front of many investment ideas. Rick has a stable of high quality guests: Bianco, Boockvar, Biderman, Trichet, Lazear … the list goes on and sometimes I wish my readers would let CNBC know how important Rick is for a larger discussion about ideas besides the most recent Apple price and latest Trump tweets.

Click on the image to watch me and Rick discuss the euro and the central banks.

Now, there are certain issues that must be watched:
1. The EUR/YEN and the YEN/YUAN crosses are important for barometers on global trade. The Chinese YUAN has strengthened against the YUAN over the last two years trading at 17.15 YEN to a YUAN. The Chinese are always aware of a “cheap” yen as it makes Japanese exports far more competitive on a global scale. The EUR/YEN fits that category also as the Germans compete directly with so many Japanese corporations for quality, high-end products. The Chinese currency is presently trading at two-year highs and should deflect some of the criticism about unfair trade practices tweeted out by the Trump White House. The euro is also on multi-year highs while the YEN languishes as the BOJ’s Kuroda maintains the stance of easy money as a progenitor of higher inflation. Beware of some of the G-7 concerns raising the issue of a relatively weak yen.

2. On Wednesday, the Bank of Canada announces its rate decision. Consensus is for the BoC to raise rates by a quarter point to 1.25%. In light of the recent employment data it would be wise for the BoC to raise rates but recent fears about NAFTA have prompted some analysts to suggest that the Canadians will keep rates steady at 1%. If the BoC fails to raise rates the Canadian dollar will fall but again I would look for technical support to buy the Loonie because I continue to believe that the Canadian economy is receiving a boost from the commodity reflation story.

3. Japanese bank stocks are finally getting some upside rally for the first time in many years. Even when the NIKKEI has joined the global stock surge the Japanese banks have been laggards. Now Mitsubishi is making nine-year highs and even the supreme laggard Mizhuho is finding some life. Can this point to a much stronger Asian growth story than markets have anticipated? The Japanese banks have been an absolutely dead money investment for nine years but it is something to watch as animal spirits latch on to the global economy.

4. There was a very important story released on Bloomberg, titled, “TWEETS BY THE ANONYMOUS OKASANMAN ARE CRUCIAL FOR TRADERS,” (emphasis mine). It appears that a very heavily followed micro blogger from Japan has been the source of many of the early released headlines that have fed volatile reactions from algo-driven headline readers. The Bloomberg story notes that on January 29, 2016 the day that the BOJ surprised the markets by going to NEGATIVE INTEREST RATES, Okasanman tweeted the headlined story 15 minutes early, which sent the Nikkei rallying and the YEN into a quick, severe drop. This is what I have warned my readers about for eight years. It is why I always urge caution and wait for headlines to drive markets to levels that provide much lower risk points for investments and trades.

5. SNB Chair Thomas Jordan delivered a speech Tuesday that failed to live up to its headline: “How Money Is Created By the Central Bank and the Banking System.” Jordan had a section in his speech subtitled, “Why the Image of ‘Creating Money Out of Thin Air’ Is Misleading.” While that piqued my interest it revealed nothing. Jordan was debunking that “money out of thin air” cannot be created by commercial banks. OF COURSE NOT that was nothing but a straw man discussion. But Jordan does conclude with the following: “The idea of ‘creating money out of thin air’ is more applicable to banks. Since the demise of the gold standard, central bank money can no longer be exchanged for gold. This means that central banks really are in a position to simply print money, as the expression goes, which enables them to meet their obligations in their own currency anywhere and at anytime.” Mr. Jordan, this is all we have discussed. It is not commercial banks that are the liquidity creators, it is the SNB. So stop criticizing those who have attacked the SNB on solid grounds. I’ll be back next week. Enjoy.


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38 Responses to “Notes From Underground: Some Issues to Contemplate”

  1. asherz Says:

    Reading Thomas Jordan’s speech, he starts off with a Banking 101 discourse. It seems his real aim is directed at a referendum to take place later this yea in Switzerland to create a sovereign money initiative to allow public sight or demand deposits at the central bank. He strongly opposes this. Read the whole speech to get its flavor.
    The very weak dollar continues to confound. One theory gaining credence is that the exclusive reserve currency status for the dollar may be challenged. Most watchers dismiss this possibility. The implications for the US if that were to happen are enormous. China has its slingshot in hand facing Goliath.
    Any thoughts?

    • David Richards (@djwrichards) Says:

      Why not bitcoin for global reserve currency?…

      The reserve currency needs to have a deep, liquid bond/bill market associated with it, into which big money can park. That exists only in US treasuries. China is a very long way away from having that, if ever. Also, foreign trust must be earned, which is time consuming and IMHO not promising with an Emperor Xi in charge who is no market visionary or reformer like Lee Kuan Yew or even Deng Xiao Ping. Bad chinese demographics, a legacy of the horrible Mao regime and the now-abolished one-child policy, also hurts China’s prospects. The Chinese economy in my view is somewhat supportive of reserve currency status because it’s about as good as any, apparently being the world’s largest GDP in PPP terms since 2014 (PPP GDP is what matters, rather than nominal GDP, please look it up or feel free to ask why) plus China has also been the world’s biggest trading nation since 2012, per Bloomberg.

      With no apparent global reserve currency substitute for the dollar in the foreseeable future, it might gradually be replaced by a basket of currencies (including the dollar), consistent with the evolution from the unipolar world of 1946-2008 to the global multipolar world already gradually unfolding today, the key word being “gradually”.

      • asherz Says:

        Your last paragraph is what I said. See below.”My time frame for China’s goal of making the yuan a (not THE)reserve currency is not today or tomorrow but within the next ten years.”
        An SDR type will replace the dollar. Again the implications for the US are large.

      • yra harris Says:

        David–that was as Asherz clarifies his point.I think trump going to davos will provide a platform for him to counteract the nonsense that XI spoke last year and which the world gushed all over the self-proclaimed free trader.It was nonsense and just made a bigger mockery out of Davos–I cannot stomach davos because I am an economic political adam Smith person in understanding the wealth of nations–and it is t this time of year I usually post a pepper spray Davos piece.As Smith said:”People of the same trade seldom meet,even for merriment and diversion,but the conversation ends in a conspiracy against the public,or in some contrivance to raise prices.”—hence,pepper spray davos.

  2. yra harris Says:

    Asherz–I agree with you about Thomas Jordan as to what he wants to accomplish but his straw man about money out of thin air was so weak –it admits that it was the SNB in the time of fiat money doing exactly what we have accused him of–he is pathetic and makes me long for the return of the uber corrupt Hildebrand and his wife.The U.S. currency is not ready to be dethroned and as Mark Twain would counter –the rumor of my demise has been greatly exaggerated.Europe is in no shape to challenge the Dollar and while the Chinese may have future thoughts their very minute role as a reserve currency makes it far off in the future,But we know the Chinese have a game plan and will wait for things to play out—always fall back to Zhou en Lai—too early to tell.First China will need to be much futher along on the One belt ,road initiative

    • asherz Says:

      Yra- My time frame for China’s goal of making the yuan a (not THE)reserve currency is not today or tomorrow but within the next ten years. The Chinese GDP will match ours in 12 years. The Chinese credit agency, the Dagong, just downgraded US sovereign debt from A- to BBB+. Small steps towards their brass ring.

  3. Mark Ott Says:

    Thank you Mr. Harris & Mr Santelli for helping to restore my faith in the basic tenet of the global financial system which is when the developed nations central banks and sovereign governments continue to print money and borrow capital from future consumption to boost consumption today at some point they will overwhelm their ability to service the debt. I am fearful as to as to how this experiment ends. When does sovereign debt interest rates skyrocket?


    On Tue, Jan 16, 2018 at 8:02 PM, Notes From Underground wrote:

    > Yra posted: “On Tuesday, Rick Santelli and I spoke, and, as usual it was > way too short as we couldn’t cover anything in the depth we would’ve liked. > Regardless, it allows us to get out front of many investment ideas. Rick > has a stable of high quality guests: Bianco, B” >

  4. David Richards (@djwrichards) Says:

    Well, CNBC is world class (like it or not) and gets lots of eyeballs, so it’s prestigious to be there and and time is in very short supply. So I’d love to also see you both on an unhurried, lengthy, non-commercial platform like MacroVoices or RealVision. But I get that it might not really work for you professionally.

    Really appreciate the video postings, as otherwise I’d miss them. More time for you’s please and less time for their regular noise.

  5. Rick Says:

    Wow, I second that request! You and Rick on MacroVoices or RealVision would be awesome!

  6. Chicken Says:

    Obviously I’m not on the SNB’s cc distribution list. (:

  7. Yra Says:

    It’s linked in the article

    • Chicken Says:

      So it is, and thanks.

      There’s more than one type of hubris but they’re both destructive.

      I was actually hoping for the memo insider traders are privy to.

  8. Arthur Says:

    what about recent comments from Appaloosa Management’s David Tepper saying the market is cheap???

    • yra harris Says:

      Arthur–not one to argue with Tepper but value is in the eyes of the beholder.There are certainly stocks of value as we have discussed but I find the over all market to be of an extremely elevated price–but I am a stock picker from the top down and can find areas of great potential

  9. Stefan Jovanovich Says:

    Adjusted for Euro and yen exchange rates against the U.S. dollar, the American stock market has doubled against the DAX and Nikkei since the 2009 panic; and 2017 was, from the point of view of foreign investors, not a bubble but a disappointment that called into question whether or not the U.S. under Donal Trump really was a very good place to hold assets in the local money. If, as Yra expects, the Chinese are ready to abandon exchange controls and allow their currency to enjoy the same futures speculations that BitCoin now enjoys, the “end of the dollar” may have the paradoxical effect of turning NY and Chicago into the Zurich that once upon a time had gnomes.

  10. Pierre Chapuis Says:

    “the “end of the dollar” may have the paradoxical effect of turning NY and Chicago into the Zurich that once upon a time had gnomes”
    Translated into layman’s speak. If the Chinese let their currency float freely, NY and Chicago will go after it to crash it? This is in reference to the accusations that were laid on Swiss bankers blaming them for the decline of the pound,years ago. Am I even close?
    I did have to look up a few things. =)

    • Stefan Jovanovich Says:

      For China’s currency to displace the U.S. dollar as the world’s “reserve” money, the yuan will have to become the unit of account for the energy trade and China’s own exports. For the world to have enough yuan to be able to pay for oil and China’s light and heacy manufacturing output, China will either have to lend foreigners the money or let the yuan appreciate sufficiently for the country to have a massive current account deficit. We now look at the U.S. dollar’s history as a long decline and fall; but the first quarter century (from 1940 to 1965) was a period of steady rise to pre-eminence. During this period the dollar became the international unit of account while other currencies – pound, French franc – went through repeated internal devaluatios or were literally vaporised (mark, yen). To preserve “blue collar” employment for his voters, President Trump has to offset the enormous wage cap between the U.S. and all of Asia (except Japan) and Mexico. He is smart enough to know that even a 50% dollar devaluation will not be enough to solve the problem so the alternative is bilateral trade agreements with high-wage countries (Britain, Japan, Canada, ANZAC, Germany) and physical and tariff walls for Mexico et. al. Since $60+ energy prices in U.S. dollars are now a net gain for U.S. a steady genius exchange rate is possible especially if the world chooses to let China become the supplier of easy credit. For China to achieve monetary dominance, it will have to let its currency be a permanent short or suffer the periodic write-downs that the U.S endured even into the late 80s (peso) when their borrowers are unable to roll over their credit lines. Against this background the no longer mighty U.S. dollar may come to be a relative safe haven for money that worries about confiscation and reserve currency exchage rate erosion. Hence, my snarky remark about the old Zurich being resurrected in the quaintly small old commercial centers of the U.S.

      • David Richards (@djwrichards) Says:

        An interesting hypothesis or two in your posts above. What do you think will be the affect on the dollar from the sovereign debts crises on the horizon, likely coming to a head in Europe before the US, and the inevitable international monetary crisis as a consequence?

      • Stefan Jovanovich Says:

        I think there is no serious possibility of a sovereign debt crisis for Euroland because (1) the EU can maintain its export surplus using its own rules under all likely terms of trade, (2) the ECB can support indefinite extensions of existing debt simply by having more meetings, and (3) pension and other accrued liabilities never have to be settled by any final clearing. The great wheel of sovereign IOUs will continue to turn indefintely. The U.S. with its trade deficit has the theoretical problem of having people flee the dollar, but that does not prevent (2) and (3) from being as true for the Fed and the Federal Treasury as they are for Europe. What 2009 established was that central banks have no limits to their ability to discount internal counter-party debts other than those of political influence (Lehman bad, Goldman good) and sovereign debts are now beyond political debate. Governments that can print legal tender will always have their pensioners be able to cash their checks.

      • David Richards (@djwrichards) Says:

        I think you make some great points. But of course with the current structure, Eurozone sovereigns have forfeited their ability to create that legal tender and they’re at the mercy of foreign bureaucrats for their shenanigans to help the sovereigns extend & pretend. Granted that can/has happened (although not yet with a German heading the ECB like apparently is due), and the pensioners bondholders etc might get paid, but then you’ll suffer currency destruction and/or collapse of confidence in the currency. Which is a soft default rather than a hard default you mention as unlikely. Either way, I expect European sovereign defaults are a high probability event with corresponding currency impact, as reflected in my/our technical analysis of Euro and currency patterns in an historical context. There is nothing really new today that hasn’t in the abstract already happened before over thousands of years, as human nature doesn’t change. And that’s why TA done well works, by analyzing these historical patterns that inevitably repeat and provide the highest probability outlook for what lies ahead. I’m still long euro in a major counter-trend rally against a high degree cycle downfall. Intermediate price targets I last published here earlier last month remain in effect, with bias to the higher part of that range in view of the price action since last time. Also remain long assets and stocks long term (notwithstanding a probable January high temporarily) per my charts and the underlying fundamental drive to exit from government/public assets into private/real assets, a byproduct of the coming sovereign and monetary debt crisis ahead, expected within years not decades. The next major QE or whatever should make it widely obvious that it’s really all just a big sham, and drive currencies & stocks etc to levels that currently seem farfetched. But we’ll see, as there’s no real certainty in uncertain markets, just varying probabilities.

  11. Brooke Says:

    One thing to consider regarding Spanish bonds, Yra:

    The the Spanish nation state appears to be successfully managing their Catalonia challenges. Also, Spain just surpassed the United States in revenue as a global tourist destination. This improves the risk profile of these bonds.

    • yra harris Says:

      Brooke–yes,this is a good point but remember that the borrowing rate has been artificially depressed by the ECB—if the ECB pulls out what would be a market rate for Spanish sovereign debt and once a market rate appears the spanish budget deficit will increase because of higher interest costs–yes Spain has improved vastly but it is still saddled with very high unemployment.This is why I believe Draghi is pressing to create a Eurobond and needs to do so quickly.The Italian elections could negatively effect Spanish debt so I would only trade the long side of Spanish bonds and not hold any invesntory

  12. Pierre Chapuis Says:

    @ Stefan, thank you for your reply and the history lesson!

    • Stefan Jovanovich Says:

      I should add that Yra’s view – that China will become the new hegemon – has a good many facts to support it. The Chinese have become the best small surface warship constructors in the world. They build destroyers better, much, much faster and at lower cost than American shipyards can; and their fleet will soon outnumber the U.S. Navy in that ship type. Currencies do – sooner or later – follow the warship flag.

  13. GreenAB Says:

    The SPD voted to continue talks for a Grand Coalition.

    But boy – that was close (56%)! The whole atmosphere of the convention felt a lot like Brexit or Trump.

    Now CDU and SPD will work out a final agreement. Which will be voted on again – this time by the whole SPD party (some 400.000 members). But this should be an easier task than the todays special Convention.

    • yra harris Says:

      Green AB—thanks for the update and the vote was closer then expected and reflects badly on Merkel—it is transparent that this is about Merkel and with it her designs on the European project–this is a dangerous situation for Germany for it doesn’t seem to me that the German voters necessarily voted for more responsibility for all of Europe.

      • GreenAB Says:

        Trying to keep you updated. It´s still not over. The Anti-Coaltion movement within the SPD is still very active. Kühnert called on people from outside to join the SPD in order to block the Coalition. And it seems to catch on a bit: at least 1.800 new members in two days. Stay tuned…

      • yra harris Says:

        Green AB–I think Merkel has totally diminished herself in an effort to sustain herself—the SPD and CDU have lost all sense of their character in an order to create anothe grand coalition–the more I read the more it seems that the biggest winners are the Afd,Fdp—

  14. asherz Says:

    With the dollar about to break 90, look at the Dr. Copper chart. hmmm

    • David Richards (@djwrichards) Says:

      A number of other charts are also at key levels, channel/trend lines, Fibonacci points (gold, silver, copper, Euro, DXY to name just a few). It has the sound and look of potential weak dollar exhaustion to me (can the inept US admin possibly inflict more harm on itself, whether by intention or incompetence?). Dollar snap back ahead?

      I’ve noticed that most every session recently sees dollar weakness worsen late in the session (but nobody seems to mention that); a change in that behaviour might be significant – a daily outside reversal even more so; perhaps tomorrow after magnificent Mario’s presser? Similarly, even dovish ECB/Mario speak has seen EURUSD rise thereafter for a year (notwithstanding the occasional knee-jerk reaction the wrong way) … so monitor possible behaviour change in that too. Markets are finally simultaneously stretched to reversal zones and COTs have extreme positioning (but remember that trend trumps COT – until trend breaks then bang!). No predictions, just some things to maybe monitor and be alert for, IMHO.

    • Chicken Says:

      Plenty of gaps to begin the session today.

  15. GreenAB Says:

    “…I think Merkel has totally diminished herself in an effort to sustain herself—the SPD and CDU have lost all sense of their character…”

    Thats spot on, Yra.

    In the eyes of many the CDU has moved way to left and the SPD has moved way to the right.

    But: to me both parties just follow a path of economic pragmatism. They EVOLVED, trying to find the right balance between corporate and social interests in a globalized world. Economically the country is doing very, very well. Record surpluses, record low unemployment, strong growth. Thanks to the grand coalition.

    If it wasn´t for the refugees you wouldn´t see much of a displeasure. If you might, please have a look at this link: (

    It shows a timeline of polls. Go back to 09/2015. This is just before the refugee numbers exploded in Germany. Back then the CDU/CSU + SPD were at 42% + 26% – which was exactly the level of the 2013 elections. Both FDP: 4% and AfD 4% would´ve been out of the Bundestag.

    And although migration numers have come way down to a normal level (from 1million to 180.000 last year) many voters cannot forgive Merkel, that she opened the borders.

    • David Richards (@djwrichards) Says:

      Great firsthand feedback. So voters apparently don’t forget/forgive something from 30 months ago even with the economy in a boom cycle? I’m sure I needn’t say that most other places the voters vote their pocketbook and good times heavily favour the incumbent.

      • GreenAB Says:

        “So voters apparently don’t forget/forgive something from 30 months ago even with the economy in a boom cycle?”

        Wish i wouldn´t say so, but that´s exactly what is happening in Germany. The Election Campaining was crazy. Each and every other issue was overwhelmed by the Refugees. The media played huge role by pushing the issue.

        And as i said – the numer of Asylum seekers has come down to levels from BEFORE the crisis, people are still obsessed with it. There are 1.6 million refugees in Germany, who Germans see in every day life. And they feel threatened – financially and criminally.

        To give you an idea what is important to the German voter (poll from last week):

        Migration 41%
        Retirement 37%
        Taxes 23%
        Healthcare 18%
        Education 16%
        Europe 16%

        In my opinion, we´re country that isn´t driven by economic unhappiness, but instead by fear of losing what you already have.

    • yra harris Says:

      Green AB–thank you for the in depth,high quality analysis.The 16% concern for Europe is difficult to read but the SPD is forcing this to the top of the agenda and I think it is very dangerous especially as the AfD nd SPD did not have enough electoral support on this to make this the paramount concern—Martin Schulz is courting disaster

      • GreenAB Says:

        Again Yra, you´re right on point. Your observation was shared by many – over the last weeks and at the convention Schulz was trying to sell “a new Europe” as a success to the SPD party. Which – besides his lack of enthusiasm – was partly responsible for the close result last Sunday. If it wasn´t for Andrea Nahles´ (the party leader in the Bundestag) emotional speech, we would have faced new elections already.

        Schulz thinks that Europe is is core competence, so he has to push it. But neither the voter nor the party is really interested. As you can see other issues are far more important. At the moment nobody is pushing for his ouster, but that will change over the year imo. He´s not the right guy to lead the SPD out of the slump and he is not popular with the German people.

        Btw: The SPD hit a record low in polls – 17%, which is desastrous but not surprising given the battle in the party.

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