Notes From Underground: This Is A Week Filled With …

This week for global macro traders is packed with data and policy statements that can ignite the volatility fuse. On Tuesday night, President Trump, the conquering hero of Davos, will deliver the State of the Union address. Chair Janet Yellen will oversee her final FOMC meeting this week. There are also several data releases Thursday and Friday, culminating with the unemployment report.

The State of the Union should allow Trump to crow about his successes (basically deregulation efforts coupled the “greatest” tax plan in history). Look for Trump to push for a massive infrastructure program with a public/private scenario. There are rumors about a rebuild America effort on the order of $1.2 trillion. The biggest recipients will be the large engineering companies such as Jacobs (JEC), ABB Group and, of course, the one I have favored most, FLUOR. Caterpillar and Deere have also been the recipients of investment money as they provide the picks and shovels for massive infrastructure projects.

I’m not looking for anything from the FOMC as it is Yellen’s last meeting and the gavel is passed to Jerome Powell. Bond yields have been rising but that is not because of odds of a FED rate hike on Wednesday but concern about an over heating global economy coupled with reduced QE programs by the mainstays of central banks. Also, hints of a massive infrastructure program coupled with rising commodity prices is making complacent debt owners nervous. The manuals for bond portfolio hedging are being dusted off. Is there a chance the FOMC raises rates on Wednesday? At first thought, there’s a slight probability of 5%, but if the infrastructure program and tax cut is massive enough, the probability may indeed rise to 25%. I would think it could be higher but I doubt that the Fed would move at Yellen’s last meeting.

I will review unemployment later in the week but one thing I want to bring to your attention was something cited by Zerohedge: An unscheduled meeting Monday in Japan between the Bank of Japan and Ministry of Finance. My Japanese political source claims the meeting did take place and while unusual, it was not extraordinary. In fact, a similar one was called the day Trump was elected. Tobias Harris of the Teneo group noted that such meetings are called when volatility increases in the YEN. I MAINTAIN THAT THE EUR/YEN CROSS NEEDS TO BE WATCHED AFTER THE MNUCHIN STATEMENT AT DAVOS. The YEN has weakened against the EURO and YUAN over the last year and the Japanese may have been advised not to push further on stimulus measures that weaken the YEN. This is JUST CONJECTURE ON MY PART. But I have warned about the short YEN trade being extremely overcrowded.

I am posting two podcasts I recorded with the Financial Repression Authority’s Richard Bonugli. One was with Peter Boockvar and the other with Boockvar and Chris Whalen. These are long but pour your favorite libation and enjoy and hopefully find some potential profitable trades. I am extremely honored to be part of this wonderful FRA project.

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37 Responses to “Notes From Underground: This Is A Week Filled With …”

  1. judd Says:

    Fabulous interviews..we just got the first puke and reversal on the 50X3 in Spu after 255 points

    • yra harris Says:

      Judd–good post thanks for the technical picture—very important to get this snapshot as volatility on the rise and i don’t mean vix–Chris Whalen really makes it an important point

  2. Mike Temple Says:

    I thoroughly enjoyed the podcast. One observation/question for you.
    As the three of you discussed, Volatility will continue to be on the rise due to the overwhelming nature of what happens as the CBs unwind. And as you all said, the CBs will probably get overwhelmed by markets, with the Fed possibly heading towards “insolvency” if interest rates rise as high as suggested.

    So, here is my observation. I am surprised none of you threw out forecasts for gold as it becomes clearer that the anti-CB sentiment (due to souring bond markets and possible equity flash crashes) should drive significant demand, along with the tail winds of a pick up in inflation/monetary velocity and political drama/chaos in DC.

    Curious to hear your predictions for gold. Personally, I believe gold is preparing to skyrocket in the world that you laid out in the podcast.

    • yra harris Says:

      Mike—my answer is this.If the central banks panic and head back to some new format of a monetary experiment in an effort to head off a model diagnosed deflationary fear,the panic will lead to a new rally in gold.Those looking for inflation as the catalyst are searching for love in all the wrong places.It is the fear of deflation which makes me question the central bank policies.Yes,QE 1 was necessary in my opinion to prevent a system wide liquidation that send unemployment into high teens or higher which the U.S. political system could not sustain.Fed policy is assymetric in that Volcker taught them how to stop inflation but the BOJ taught them to fear deflation.I refer to Bernanke as a ’37 er as he promised Milton Friedman that the FED would not make the mistake of 1937 ever again.This is why we continue to wind up with fragile financial situations—ever more frequent.The fear of deflation has lead to to the demand for gold–but i would like for silver to set the pace and the gold/silver ratio is definitely stuck at historic high levels but SILVER IS HUGGING the 200 week moving average and it is a nice broadening formation.

    • David Richards (@djwrichards) Says:


      If like I’ve been suggesting just recently, the dollar turns and stages its largest recovery of 2017-18, that’ll be a headwind to suppress gold. Per Yra above, gold is most responsive to high deflation (think bank collapses) and I’d add also a public loss of confidence in government (think sovereign debt crises, which are coming but not yet, which by the way will also drive money from gov’t bonds into stocks later regardless of high equity valuations).

      Gold will have its time but not yet. Too much optimism for gold and the weak silver:gold ratio isn’t supportive of precious metals.

      So here’s a much better looking setup in metals:.. Long copper.

  3. Richard H Papp Says:

    If you connect the high in gold of 2016 & 2017 with a trendline on a 4 X 12 point and figure chart its extension come in at the 1340 area. We have had four second fixes in a row above 1340. Personally, I remain an agnostic as to gold’s direction due to CB influence. A move above 1365 with momentum would be impressive. If failure, a move back to the 1260 area could be possible!

  4. Stefan Jovanovich Says:

    I wish Rick Santelli would interview Yra about the beginnings of FX futures trading. That mustard seed has grown into the world’s predominant market tree – one that overshadows even the central banks and dictates to them was pricings will be. Then, I wish they would both answer the question implicit in the following thought-experiment: “When a market for currencies first developed, many people looked to commodities in general and the precious metals in particular as “real” money alternatives. “Inflation” was measured by the rises in the dollar prices of the futures for these goods. That exchange – “real” money for “fiat currencies” – has become so thoroughly embedded in the common view that people now propose that crypto-currencies – block chain tokens of electricity consumption – can offer the same offsets to central bank monies. But, what if the complete monetization of sovereign debt by central banks has created the same paradoxical situation that Nixon’s “defense” of the dollar established? The U.S. decision to halt gold redemptions – without using it as an opportunity for devaluation as Roosevelt had – was supposed to signal to the world that the U.S. would hoard its reserves. The world was supposed to draw the conclusion that the dollar would now be “strong”; and, for over a year, it was. But, then there was the Gulf crisis and the Arab oil embargo.
    What the unexpected event this time is the opposite of 1973? What if the shock is a fundamental reduction in energy demand? A breakthrough in electricity storage technology – one that fundamentally reduces the cost of peak power demand capacities and permanently lowers the marginal cost of A/C power distribution – would produce that result. For the users of energy in manufacturing and data processing, this would be a bonanza equivalent to the one that the combined uses of coal and railroads and steamships produced in the second half of the 19th century. But, for the investors in energy generation, it would be as ruinous as the fall in grain prices after the end of the Crimean War was for the farmers and speculators in the American Midwest who began American commodity trading. The result would not be “deflation” in any monetary sense; but its effects would be as completely devastating as those of the Panic of 1857, especially if the national Treasuries/central banks were to reach the same conclusion that they did then – namely, that financial intermediaries, including the dealers in short-term sovereign credit, had received all the credit that they were going to get.

    • yra harris Says:

      Stefan–I have much to think about .You are a wonderful addition to this site as you challenge me and the other readers and as I continue to stress—Notes from Underground is about dialectic ,not validation.The man to ask about the inception of FX futures is Leo Melamed who reads the blog and maybe we can get him to respond.

  5. Chicken Says:

    It’s nice to know Chris Whalen’s friends and family are doing well this past year, who would’ve expected that?

  6. David Richards (@djwrichards) Says:

    Some good thoughts to ponder in the audio, but I’m skeptical about that notion that Powell, the Fed and other CB’s are shifting from an easing to a tightening paradigm. IMHO that’s another false narrative First, notwithsanding a few tiny Fed rate increases, financial conditions per have in fact been continuously easing materially for two years in the US and everywhere per the bank charts I see (blame the hugely weakened dollar). Second, expect Trump may start tweeting blame to the Fed when his beloved stock market barometer turns south, and Powell will acquiesce. We’ll likely soon see because the “probable January high” I posted here on Jan 20 (in Some Issues to Contemplate) has materialized. I anticipate a relatively brief correction until equities (and assets) resume their march upwards again as the Fed and other Central Banks blink. Also, I’m sure they’re sensitive to what happened in Japan in years past when the BOJ tried to unwind some accommodation and the Japanese economy & markets rolled over for, according to the easy money crowd, having made the policy error of removing the foot from the monetary accelerator too soon.

    • yra harris Says:

      david–reuters ran a brief hit about Larry Lindsey withdrawing his name from FOMC Vice job—–more to follow and no surprise to this analyst

      • Chicken Says:

        Whoops, not good considering Powell is only an attorney as opposed to an economist like Lindsay and Lindsay has argued the tax bill relies on accommodating support from the FED. I have yet to discover the reason for Lindsay’s withdrawal.

      • David Richards (@djwrichards) Says:

        Thank you for this post because I never heard of Larry Lindsey before.

        Yes, I also wonder why he withdrew. Perhaps it’s personal or perhaps he doesn’t wanna become another Stanley Fischer.

        As for having a non-economist at the Fed, the guy in the audio for this post says it’s a good thing and I agree. But instead of a lawyer, they need a really good trader. Because for that job we really need someone who understands markets, which comes only with the extensive trials & tribulations of trading for a long time….. Yra Harris for Fed (vice) Chair!

  7. A.M. Look 1/30/18 | Says:

    […] […]

  8. Chicken Says:

    Cryptocurrency losses for banks whose customers loaded up their credit cards?

  9. GreenAB Says:

    Holy cow!

    Look what they´re doing to Volatility products after hours! MASSIVE forced selling or rebalancing from short vol to long vol. Crazy!


    Either is is a (short term) bottom… Or I´m afraid we´re in for VERY BAD things to come. If they´re unable to stabilize the market tomorrow we might might be in for an avalanche, of which´s final outcome i don´t want to think about…

    • David Richards (@djwrichards) Says:

      It’s the inevitable result of years of Fed policy error, courtesy of Bernanke and Yellen. And the rest of the easy money crowd that believes in market manipulation

      The response will be more market intervention. See this is the problem; nothing gets flushed when it should, making a bigger reset later inevitable. Folks way smarter than me have been saying that when the VIX inevitably soared like this, and the short-volatility crowd can’t cover their margin calls, the exchange will buckle and the easy money, interventionist crowd who call the shots will reset the VIX level by decree or something (like powell’s printing press?) to reduce losses (and gains of those on the winning side).

      This is just the relatively brief correction that follows my January high. NO CRASHES ALLOWED. It’ll be a buying opportunity.

      By the way, how freakin lucky is Yellen that she got out literally right before VIX collapsed. Her entire tenure was lucky timing. Well, better lucky than good, and we all know that she certainly wasn’t good.

      • Chicken Says:

        Who knows but is it safe to assume market intervention isn’t selective? Central banks choose winners and I don’t think first on the list is Joe Sixpack.

    • Chicken Says:

      Looks like termination clauses in effect, CS getting hit too.

      • GreenAB Says:

        Yeah, fascinating stuff. In the first AH trading hour nobody had a clue what´s going on.

        Crazy stuff – XIV NAV at 4 p.m. aroung 72 or so. And after the carnage all that´s left is 4 bucks.

        Stuff like this will undermine confidence even more. And since Trump has chosen to make the stock market his “thing” the media is all about every drop, which in turn fuels further selling.

        I have a hard time seeing that they can stop it at this point. You cannot start another round of QE just because stocks are 10% off their highs. Meanwhile the ECB+BOJ are already buying stuff.

        At the time of writing ES is down another 60…

      • David Richards (@djwrichards) Says:

        GreenAB, I agreed policymakers can’t start QE next month; it’d become too obvious it’s all a sham (which it is of course).

        When I wrote they’ll intervene, I didn’t mean now; rather it’s in their toolkit in this era of easy money interventionism with a low threshold for market pain – and they’ll use it until the market takes away the keys (we’re not there yet). I don’t believe the narrative that CB’s have changed their colours from market-friendly easing to market-hostile tightening.

        But as a technical trader I call it as I see it on the charts… which was a January top with a relatively quick correction before all-time highs later, at least nominally in the Dow.

        Finally, thanks for your wonderful insights on the German politics. Can’t find that anywhere else. If you’ve ever anything about Italy next month, that’d be awesome too :).

  10. The Bigman Says:

    To paraphrase that masterpiece Five Easy Pieces: Auspicious beginning, Mr Powell

  11. GreenAB Says:

    @David Richards: You still believe in new highs after the correction?

    I´m not a super technician but the charts to me look like a “bump n run reversal” like this:

    Let´s see if the SPY can find support around 2.520 (main uptrend).

    What´s concerning is that the BRADLEY Model seems to work this year.

    It shows a major turn date on January 29, which was spot on. Only two minor dates from here with the next major date on 5/29 (bottom?).

    Honestly i have no idead what´s going on in Italy. It would be nice if you keep us updated what´s going on over there. Thanks a lot!

    • David Richards (@djwrichards) Says:

      Yes I still do, as we see no evidence yet in our proprietary model of an invalidation of the long-term uptrend in the Dow or S&P. Apparently neither does that Bradley model if I’m seeing it correctly (I’m unfamiliar with it). Very impressive or lucky that it caught the timing on the low; I’m certainly not that good nor a ‘super technician’.

      And although I live and work in Asia (Singapore, and previously Hong Kong) I’m not too connected or aware with what’s happening here. It’d be better if I was Asian or spoke & read the language. But at least my kids will.

      • GreenAB Says:

        David: as for the Bradley Model: you can forget about that chart. All that matters is the dates, especially the red ones. What´s important is, that the red date only tells a major change in trend, but not the direction.

        So in this years case the 1/29 low will probably turn out as a major high. If the model continues to work the market won´t bottom until May.

        Caveat: There are years, when the Bradley model is spot on. In other years it doesn´t work for stocks, but it signals turning point´s for yields or commodities. So take it with a grain of salt.

        As for the uptrend: At the beginning of the year the SPY broke out of it´s mid term uptrend channel (from mid 2016) to the upside. During the mini crash it returned inside the channel. The upper boundary of the channel now works as resistance, at which the market turned down perfectly today. That´s the reason i see trouble for new highs ahead.

      • David Richards (@djwrichards) Says:

        Certainly so on the short term charts, but the weekly monthly and yearly haven’t broken support yet. The weekly might (I just watch the numbers for a tell and it’s premature yet) but we expected a cyclical January high then stock weakness into at least March. OTOH most (but not all) Elliott wavers have already called a top at many degrees of trend, but many of them also did so in 2015 and missed 2+ more years of huge upside because that proved to merely be a multi-month correction rather than a primary trend change. This looks like a potentially similar bear trap but it’s too soon to tell. IMO people tend to be too quick to call a primary trend change. Indeed this week we saw the financial media overwhelmingly call a trend change for the VIX, precisely at what may be its panic high point.

        If we do see the Dow move down into March as expected, then retrace higher, then make a new panic low late spring, that could be the 3-wave complete correction we’re looking for, setting up another impulse higher coinciding with the next big leg down in the dollar we expect after a major dollar retracement higher that’ll become the biggest dollar recovery in 2017-18.

    • Yra Says:

      Green AB–the compromise that Merkel made to secure the grand coalition is a genuine statement about her weakness—the SPD is coming out of the negotiations with a major victory and how well with that sit with the German voters as the weakest party is going to set the agenda on Europe—maybe you can clarify some things that I may be missing

      • GreenAB Says:

        “…the SPD is coming out of the negotiations with a major victory..”

        You have a great perspective… that the German public doesn´t!

        Boy, it´s crazy – all the rage is about the SPD… weakness! Although you an I think these are great results for the Social Democrats – many in the media and the party don´t think that way. The Kühnert “No GroKo” (no Grand Coalition) movement reached a point where in their view anything than less than 100% SPD positions is a failure. Crazy.

        So the SPD didn´t get two major points, the base would like to see. I won´t go into detail, but let me assure you that this coalition agreement has tons of social democratic content (and not so much CDU style). Anyway – because they didn´t get everything they aimed for, the SPD leadership is scared that the base might say no.

        And so Schulz (who in one year did everything wrong) decided to step down as the SPD chief and hand the keys to Andrea Nahles. Remember – as it wrote, it was Nahles´ emotional speech that secured the Yes for the coalition talks at the convention in January. If there´s anybody who can hold a deeply divided party together – it should be Nahles. She´s also a former JuSo chief (Young Socialists – the position, that is currently owned by Kühnert.)

        So can we breathe deep and plan for the next Grand Coalition? I´m still not sure. After Kühnerts call some 25.000 people joined the SPD in order to vote on the coalition agreement, most of them joined with the intent to vote No. These 25.000 are about 5% of the total party. As I said – the party is divided and there´s no clear picture how they will decide. My guess is that it´s gonna be close.

        As for Merkel and the CDU – jugded by rational perspective they are the major losers. They gave away a lot to the SPD including the all important Ministry of Finance. Merkel can stay in power and they (the CSU) own the Ministry of the Interior, which is important when it comes to immigration (still the major issue). But besides that, there´s not much to brag about.

        Still Merkel managed to put HER people into the various Ministries, which is a sign of strength within the party, at least for now. Her major rival – Jens Spahn – seems to get nothing, which could be a major blow to his ambitions.

        So we have a weak SPD, a weak Merkel and also a weak Seehofer (CSU chief), who agreed to hand over the power in Bavaria to Söder in a few months.

        With that sad – everything comes down to the vote of the 470.000 SPD members. Should they say No (sometime in March) the whole game will change and nobody will be safe.

        As for Europe: the SPD prevailed. We´re set for deeper integration, politically and financially. Macron will like that. I´m excited to see what France and Germany can do together.

      • David Richards (@djwrichards) Says:

        So March looks potentially pivotal for Europe; remember there’s the Italian elections too in March. Polls I see say that Italians overwhelmingly want to exit the EU (Italy is the most euro-skeptic nation in Europe) but they also want the Euro not the Lira, so go figure.

    • GreenAB Says:

      “Let´s see if the SPY can find support around 2.520 (main uptrend).”

      Bounced right off the uptrend (today around 2.535). Now let´s see how far they´re going to take us…

  12. David Richards (@djwrichards) Says:

    > “expect Trump may start tweeting blame to the Fed when his beloved stock market barometer turns south”

    Just to follow up, Mr Trump isn’t yet blaming the Fed for stocks, but he is blaming the FBI… He said:

    “I understand the stock market like nobody does and, I’m telling you, when the FBI started spooking people into selling shares, the market went down. That’s how it works. Not a lot of people know that. So the key to keeping this bull market going is getting the FBI to declare a state of economic emergency and insist that the big Wall Street players get back on a buying spree. If they don’t, I’ll call it treason.”

    Art Cashin, the veteran UBS director of floor operations at NYSE, said he saw no connection between the market swoon and FBI. In response, Mr Trump said,

    “Don’t listen to that old fart, his name is Cashin, right? He’s obviously trying to ‘cash in’ on this FBI scandal to pocket millions for himself and turn me into a laughing stock in the trading pits. Screw that greedy geezer.”

    This per the source below, which I don’t know, but it was cited by the reputable and brilliant Kiril Sokoloff of 13D Global.

  13. Chicken Says:

    We must be getting the watching paint dry discount.

  14. David Richards (@djwrichards) Says:


    If like I’ve been suggesting just recently, the dollar turns and stages its largest recovery of 2017-18, that’ll be a headwind to suppress gold. Per Yra above, gold is most responsive to high deflation (think bank collapses) and I’d add also a public loss of confidence in government (think sovereign debt crises, which are coming but not yet, which by the way will also drive money from gov’t bonds into stocks later regardless of high equity valuations).

    Gold will have its time but not yet. Too much optimism for gold and the weak silver:gold ratio isn’t supportive of precious metals.

    So here’s a much better looking setup in metals:.. Long copper.

  15. GreenAB Says:

    David: the results of the SPD vote will be released at the day of the Italian election. (March 4th) could be a defining day…

  16. Chicken Says:

    You will be mine, you’ll be mine, all mine. I will be your knight in shining armour riding a fine Arabian charger coming to your emotional rescue……

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