Notes From Underground: How I Learned to Stop Worrying and Love the Donald?

It seems that the White House emptied and traveled to Davos in an effort to gain control at ground zero for access journalism. The fawning media has been the epicenter for President Trump’s assault of the airwaves. The anti-globalist, drainer-of-the-swamp has become the story emanating from the Alps in an effort to destroy the memory of Chinese leader XI at last year’s conclave. President Donald was the perfect foil for the globalist masquerade party just after his inauguration but in 12 months he has hijacked the entire soiree. On Wednesday it was Trump’s minions, Mnuchin and Ross, threatening the world’s money lords with the commencement of a global trade/currency war as the U.S. Commerce Secretary was sending soldiers to the ramparts with threats of throwing dead green presidents to their doom.

Today, the President wipes the media’s drool off his cashmere overcoat and offers up his desires for a STRONG DOLLAR and the possibility of entering the NEW, IMPROVED TPP with a TIDE of warming for all things global in nature. If there is one thing this White House has become accomplished at is the ability to create short-term volatility in various markets. Gary Cohn may be considering returning to the Goldman trading desk.

In a response to Wednesday’s market-moving statement’s from Mnuchin/Ross, ECB President Mario Draghi spent his press conference answering many questions about the impact of the EURO currency’s recent appreciation on the ECB’s inflation projection. Draghi was very troubled by the designs of the Secretary Mnuchin that he couldn’t bring himself to say his name and turned it into a running joke with the media.

Draghi continually reiterated the statement from the October 14, 2017 IMF communique about all G-20 members agreeing to refrain from competitive devaluations of currency values. While we’re at it, here is the portion of the statement and my response:

“We recognize that excessive volatility or disorderly movements in exchange rates can have adverse implications for economic stability. We will refrain from competitive devaluations, and will not target our exchange rates for competitive purposes. We reaffirm our commitment to communicate policy stances clearly, avoid inward-looking policies, and preserve global financial stability.”

This statement is devoid of reality as it fails to acknowledge the spirit of every central bank policy statement. The RBA, RBNZ, SNB, BOE, BOC, BOJ and ECB all discuss the relative strength of their currencies in determining short-term interest rate decisions. The TRUMP administration has frequently alluded the strength of the U.S. DOLLAR in citing concerns about America’s massive trade and current account imbalances. As in quantum physics, you can’t act on something and observe it at the same time.

The press continued to challenge Draghi as to whether or not the ECB is guilty of currency manipulation through its aggressive QE and negative interest rate policy. Draghi was irritated as he stressed “monetary decisions may have impact on exchange rates but the difference is that they are not being explicitly targeted.”

The ECB seemed to have concluded that a strengthening currency does have an impact on the inflation path but it is difficult to predict the “pass-through” effect. The U.S. administration has definitely caught the world’s attention about trade while it is visiting the ALPS. As predicted, President Draghi did try to jawbone the EURO lower with dovish monetary statements but to no avail. Sometimes a few words from President Trump is more powerful than the printing press.

When all was said and done Draghi confirmed (yet again) that FORWARD GUIDANCE remains in place, negative interest rates will continue, QE should continue through September and the ECB will remain aggressive until it achieves its headline inflation target. The ECB defends its stimulative policy as an antidote to the inability of the European politicians to implement structural reforms and substantially stepped up fiscal stimulus. Also, Mario stressed the need for Brussels to create a banking guarantee scheme and the necessity of a capital markets union.

One area where President Draghi came under attack was for his violation of the CAPITAL KEY restriction on asset purchases. But Draghi was ready for the question and told the inquisitor to stop watching the day-to-day flows (i.e. ECB purchases) and pay attention to the STOCK of ECB assets. Balance sheet totals were all capital key compliant. He even noted that ECB holdings of German assets were beyond statutory limits, while Greek levels were below. Overall, the ECB press conference was dovish on monetary policy. But everything was overshadowed by the machinations of the Donald.

Tomorrow the U.S. releases the first look at fourth quarter GDP but it surfaces around the time that CNBC releases its taped/edited interview between Joe Kiernan and President Trump. Gee, I wonder if any trading entities have the key headlines  from the interview: Maybe, Trump Takes Davos by tweet? The hills are alive with the sounds of fingers clicking.


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16 Responses to “Notes From Underground: How I Learned to Stop Worrying and Love the Donald?”

  1. Chicken Says:

    “He makes bath time lots of fun.” 🙂

  2. David Richards (@djwrichards) Says:

    “Mario stressed the need for Brussels to create a banking guarantee scheme”
    What’s that? Socialized banking?
    Zombie, zombie, zombie-ee-ee-ee-oh (RIP Dolores)

  3. GreenAB Says:

    Great post, Yra. Had to laugh a few times. 😀

    • yra harris Says:

      Green AB—thanks as laughs were certainly intended.The reality of global finance brings tears so we have to seek for laughter

  4. Bojo Says:

    After the burst of the Mississippi bubble in 1720, John Law supposedly had to escape France dressed as a woman. Mario really might consider doing some shopping for women clothes…

  5. David Richards (@djwrichards) Says:

    Also, from the Eurozone Pretend & Extend Dept, the ECB had to indefinitely suspend (read unofficially cancel) its proposals for covering some bad loans, which are pervasive in Europe but particularly intense in the south and Italy, where an alarming ratio of loans have default status yet remain on the books on the asset side of European banks, hilariously at full value still. Heavy rebellion by the banks against the proposal to write off some of these default loans and widely expose the covered-up insolvency of the European banking system effectively scuttled the ECB proposal. This shows how the European banking crisis is a pressure cooker with systemic problems swept under the rug still, despite years of QE. A banking system collapse in the Eurozone and a financial crisis for the ages is being postponed with whatever it takes, but nevertheless seems inevitable.

    Also the BIS is out with data showing that European sovereign and non-financial have borrowed $9-trillion of loans in dollars, that somehow must be repaid or rolled over within the next several years, against only $2-trillion of Euro loans outstanding. Where the heck does Europe expect to get 9-trillion USD from? Especially as the Fed runs down its balance sheet and rising US protectionism cuts into trade and dollar funding to the world. Everyone is apparently short dollars. So it has been a great year to borrow dollars while they’re collapsing in value, but in the end Europe cannot print dollars when repayment comes due.

    • yra harris Says:

      David–it sounds like you are ready to reverse your long held positions.Yes,the European banking system is challenged to say the least but Draghi cares not for it is just another reason to push for a single banking entity and creates the need for consolidation of all ECB sovereign debt into a Eurobond.Borrowing in dollars has been a wise decision but remember when eastern European citizens were borrowing in Swiss Francs–it was a wise decision until the SNB pulled the Peg—the global financial system is fraught with many potential areas of contagion all involving the massive debts taken on in the era of unlimited QE—-this is not to say that it all unwinds tomorrow but as asset prices rise to infinity the risks grow.The BIS and others have been “kind” to European banks by maintaining all sovereign debt with a zero risk weighting.If this ever changes the capital rise by European institutions will be enormous multiplying the issues you raise concerns about—but no need to worry as equity rises in value–maybe somebody ought to realize it may be time to convert debt to equity in an effort to reduce future debt payments.

      • David Richards (@djwrichards) Says:

        No, although the dollar finally made a daily reversal with a bang, that signal didn’t complete with any follow-thru Friday as currencies rose again. DSI sentiment shows crowded Euro longs but less crowded than COT, with room to run yet. Momentum of current trend is strong and picking a top is a fool’s game but we must try anyway so I do expect another Euro leg up. But technically I prefer some other currencies like CHF as you’ve mentioned, although I don’t follow/understand CHF fundamentals ever since the SNB peg era that you so accurately stated would break. Technicals help tell us when (except in vertical markets), but fundamentals tell us what and the fundamentals seemingly warn that Euro is a (major) countertrend.

        Yes forcing bank debt to equity for both bondholders and depositors could help banks (if not the shareholders or depositors!) but sovereigns don’t have equity so IMO they’ll do as before and simply default eventually in some form or other. Regardless it won’t be called a default because that’d ruin the insurers. But I think what we need to fear more than a debt crisis or market panic etc, is the societal changes the upheaval may bring because unlike ten years ago when rates were much higher and debts much lower, governments and institutions have no room to respond anymore. Last time like it we got widespread populism, communism, fascism, WW2. Yikes.

  6. Stefan Jovanovich Says:

    I hope Yra, as a trader and investor, will forgive this investor (who buys and sometimes sells but never trades) from wondering if his reply to David is at least a partial acceptance of my thesis that Chicago’s traders will eventually become the gnomes of Zurich as far as the U.S. Treasury and its dollar are concerned.
    Traders are understandably concerned about the “dangerous words” being used by the House of Orange in Davos; but, from an investment point of view, they are wonderfully encouraging. The United States, as a nation of gamblers, has never been the place where the rest of the world came to get a loan; we have been and always will be the people who ask for a perpetual rollover on our line of credit and welcome other players to pull up a chair at the table. Even in those times in the 20th century when Europe, East Asia and the rest of the Americas decided to commit suicide by war, the U.S. “trade surplus” and “reserve currency” were more a matter of giving other people chips to play than the kind of investments that the British, Dutch and Germans made before WW I in our country. (The Marshall Plan and the Dawes and others before it were a matter of sending U.S. gold and gold-backed dollars overseas so they could immediately be returned to the U.S. as loan repayments and purchase orders for American manufactures and agricultural exports.)
    If, at present, the U.S. dollar is not getting a bid even though we have rising interest rates and fiscal stimulus, that is – from the point of view of us investors – confirmation that something is finally right again. The extraordinary rise of the U.S. in the last third of the 19th century had many causes – invention, enterprise, the end of slavery – but, without Ulysses Grant’s fundamental reforms, it would not have happened. The U.S. became the world’s favorite casino because its chips would be immediately exchangeable into gold and its Treasury would keep straight books that were open to examination. The Swill with their secrecy followed a very different model after WW II; but both periods had one thing in common. The holders of the currency itself had no exchange risks from government capital controls.
    A “safe haven” currency is certainly not an effective hedge against inflation. Measured against their own costs of living, Swiss citizens did not profit from their currency’s exchange rate rise from 4.3 francs to the dollar in 1971 to the current par. Whatever the Swiss “made” in terms of trade had to be spent on the renting and owning of property and the increased wages for their fellow citizens. But, until recently, when, as Yra noted in a recent FRA interview, the franc became the most successful of all cryptocurrencies, the franc did offer its holders the promise that the quantity of Swiss currency would exist independent of interventions by the central bank and national Treasury. That was precisely the promise that Mnuchin and the Wilburine and the President made. So, as the traders wisely stay short, we investors consider the question of which dollar assets are the best ones to go long for the next 2 to 3 decades.

    • yra harris Says:

      Stefan—wow packed with all sorts of gems.Two to three decades I certainly can’t say as the U.S. is plagued by promises to its citizens that will be difficult to meet with current valued obligations.All things are relative in the world of global finance and no absolutes except that too much debt chasing limited opportunities always ends economic cycles.The FED is fearful about the existence of too much Chinese capacity bringing a wrath of deflation down upon an over leveraged global financial system–so investors can visualize 2-3 decades but I am trying to ascertain at most a 24 month horizon but to trade it with opportunities for the most efficient value—-but I respect your view and your in depth knowledge of American economic history—-the FED will not allow us to be crucified on a deflationary cross of gold,nor will Mario draghi allow Europe to be crucified on a D-Mark cross

  7. Chicken Says:

    How much will repatriation affect the dollar? Also, there will be fewer dollar loan demands and repatriated cash can be used for repayments?

    • David Richards (@djwrichards) Says:

      Little dollar affect per JDI research in Paris because most US firms already retain cash in USD funds. That said, I expect a substantial multi-month retracement (at least half?) of the past year’s EURUSD gain is approaching, perhaps after one more down-up move like I wrote last week (alternatively, this retracement has already begun). But any future narrative that it’s due to repatriation is false, as we discussed a pending EURUSD swing high last month even before tax “reform” was passed, based on technical considerations. Impeachment is the big fundie that could really affect the dollar (and markets) but exactly how is beyond my pay grade and I’d love to know? Guessing that stocks would dislike the uncertainty from impeachment proceedings? But the dollar?

      • Chicken Says:

        Good explanation, thanks.

        I’ve been hearing impeachment was to occur by Jan 18th. Comforting to know the best and brightest are on on top of it and “we’ll get ‘er done”.

  8. ARTHUR Says:

    Why has the oil price more than doubled in the space of two years, against all expectations? Thanks.

    • yra harris Says:

      Arthur–the answer is we don’t know but some pundits would discuss global growth.I wrote a piece in early October warning about the shifting political sands when the Saudi King went to Moscow–a first time event.The recent low for oil was made within a few days–I believe that the saudis offered up higher oil in return for Russian support in sorting out the problems in Syria,Iraq,and with Iran—Putin is now the fulcrum of resolving or stirring -up conflict.Obama and Kerry surrendered U.S. influence when they leaned on the Russians to clean-up the chemical weapons mess.Russia is definitely calling the shots in the violent plagued mid-east regions and the price is higher oil.yes this helps the Iranians but the saudis are definitely in need of help.Some think the issue is Aramco becoming a publically held entity but i am not convinced

    • Chicken Says:

      Looks to be cooling off a bit but OGZPY has been on a roll. FWIW

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