Notes From Underground: Ball of Confusion

Segregation, determination, demonstration, integration, aggravation,

humiliation, obligation to our nation

Ball of Confusion that’s what the world is today [yeah, yeah]

The sale of pills is at an all time high

young folks walkin’ ’round with their heads in the sky

Cities aflame in the summer time, oh the beat goes on

Eve of destruction tax deduction

City inspectors, bill collectors,

Evolution, revolution, gun control, the sound of soul,

Shootin’ rockets to the moon,kids growin’ up too soon

Politicians say more taxes will solve ev’rything, and the band played on.

The European political situation is a ball of confusion as the Germans created grand coalition and get Chancellor Merkel for another four years.T he problem is that the German Chancellor has empowered a party weakened in the electoral process. For the next few months it will be important to watch the Grand Coalition to see which way Merkel wishes to govern. Currently, it seems that the Coalition will lean toward the center/left as the chancellor presented the Social Democrats with the Finance Ministry, typically a CDU stronghold, especially under the previous Finance Minister Wolfgang Schaeuble. The German persistence for fiscal austerity was a primary stipulation for Schaeuble offering financial support to any European country dealing with financial stress.

The Italian election yielded more confusion as the right side of the political spectrum crushed the current sitting government. Between FIVE STAR and the Berlusconi configuration the voices of populist conservatism (not yet fascism) garnered more than 60 percent of the popular vote. Will Five Star join a coalition? We don’t know but Brussels has to be cautious in threatening the VICTORS because the Italian financial system is TOO BIG TO FAIL and it is very FRAGILE. Berlusconi is a politician scorned by the Eurocrats and he understands Italian economic weakness is a political strength because Europe could not let Greece. So the Italians really are aware of the consequences of an Italian financial crisis. ECB President Draghi, whose term ends in 18 months, will be in the position of “whatever it takes to” aid Italy. Confusion rolls on.

President Trump’s tariff weapon is creating great confusion: Is it a bargaining chip or a genuine attempt to topple the global trading system?

As I wrote in the last post, using national security as an excuse for aluminum and steel tariffs hearkened back to the post-war anti-communist impulses for justification to enact all sorts of legislation and executive decisions, the result of which is increased taxes and large spending programs (think section 232 of the Trade Expansion Act of 1962). To me, President Trump’s move to initiate this action suggests it’s an effort to shore up his base. Will it actually start a “trade war”? We really don’t know as President Trump does a great of posturing in an effort to always control the narrative. On Tuesday, the equity markets surprised traders as the German equity markets turned higher despite the angst from the Italian elections and Trump threatened to place increased import taxes on German autos. While Trump can practice buffoonery he is a novice compared to the idiot Jean Claude Juncker, who, like Trump, irritates allies and enemies alike.

Juncker was quick to suggest that Europe would enact tariffs on several American manufactured products. Message to Mr. Juncker and French President Macron: Historically, the French have been some of the world’s most aggressive trade protectionists, so, Mr. Juncker, sometimes silence is indeed golden. By the end of the day the Mexican peso had rallied back to close HIGHER so insiders may be aware of a softening in the rhetoric, especially as it comes to NAFTA. To think of it in these terms, the weakness of the peso and Canadian dollar may become an alternative discussion to tariffs. Pay close attention to price action as the discussion about tariffs continues. In the meantime, let confusion reign.

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19 Responses to “Notes From Underground: Ball of Confusion”

  1. Asherz Says:

    Yra- I’m not sure I would call the President a buffoon as most of his policies have aimed at righting our ship of state that had been listing terribly.
    You must remember that he is not a politician but a master negotiator. You start off by announcing a tariff on two products. The world reacts with hostility- so called free trade (hasn’t existed for decades) has been a given. You then begin to level the playing field putting your sights on dumping, currency manipulation, foreign subsidizing of domestic producers, etc. He is less of a buffoon than you may think. His tactics are different but look at the results over time rather than his Twitters and statements that are made to keep others off balance. A unique approach to the presidency.

    • yra harris Says:

      Asherz–he is a buffoon in his methods ,a disrupter in his desires as Peter Todebush so rightly points out and you imply.I have actually stated this would be his M.O. after he got elected and he would try to roll back Pax Amerikana–I have a theory able why he was so brash last Thursday and will put it out tonight.But while Trump is what he is,Jean Claude Juncker is far more worse and sinister in his methods

      • Stefan Jovanovich Says:

        Pax Americana is not a useful abstraction because it brings together two facts that have very little to do with one another: American military spending and wars among foreigners. Even under Obama the U.S. spent almost nothing to bring peace to the one continent that continues to be savaged by war. Trump’s reward for trying to do something was to be condemned for having an American soldier of African ancestry actually die. Military and medical and education spending are the Keynesian triplets of all post-1960 budgets in the U.S. A very good argument can be made that the more Trump spends on defense and the less he spends on universities, the safer Americans are. The higher minds committed to Foreign Affais are the danger, Yra. They always have been.

      • Asherz Says:

        Yra- A disrupter at certain times is a very necessary method when things are not working well. Schumpeter recognizes this in economics when describing creative destruction. In politics our Founding Father’s disrupted in the Revolutionary War. Those who are made uncomfortable in the establishment, the crocodiles in the swamp with the media as their bullhorn, will describe his methods as buffoonery and those who cause needed change are often described as such. Again judge Trump in policies and results and not in his words and unorthodox methods.

    • David Richards (@djwrichards) Says:

      Speaking of currency manipulation, US is arguably the worst currency manipulator in the world second only to Switzerland.

      I hope Mario tomorrow announces a new Swiss-inspired plan to print trillions of euros with which to directly buy US equities and drive EURUSD down to parity and peg it there. Fair is fair.
      Trump’s head will explode as he won’t know whether to rejoice at soaring stocks or be enraged by being out-currency-manipulated.

      Crap along the lines of this seems to be coming down the pike as the inevitable currency war gathers pace. Knives will come out and then they’ll be replaced with guns. The broken monetary system will crumble along with key institutions. Gold bugs may finally get a day in the sun. Economic suffering could become severe, widespread and prolonged. Bigger and deeper than the 2007-09 US recession.

  2. Pierre Chapuis Says:

    Can anyone explain to be why the yen continues to strengthen against the US$, while it seems the dollar has caught some traction against all other currencies?

    • yra harris Says:

      Pierre–this blog and several hits with Santelli have discussed the vulnerability of the YEN to a I pointed out and was criticzed since the end of December–the yen short trade was very crowded as the YEN was a heavily favored short of the carry traders.In addition the weakness of the YEN especially against the EURO was going to be a problem for the yen shorts as the Europeans were only going to allow this manipulation by the BOJ to go so far–the high on eur/yen was made 2/2/18–137.50 the same day that the equity markets began to get hit.The YEN tends to rise when world turmoil increases as japanese domestic investors rush to return money home and nobody has more money invested around the world then the japanese.In the present turmoil and fear of trade wars the Japanese get nervous as many fingers point to them as being currency manipulators to gain a trade advantage—the recent low in the Eur/Yen cross was the 200 week moving average of 129.50–so we have a very large range to judge YEN levels ;this is just over the last thirty days

    • David Richards (@djwrichards) Says:

      Pierre, not so sure about that ‘dollar traction’ anymore. Look again now, as Dollar sits at or near multi-year lows against most currencies except loonie. The Dollar Index has an 8-handle, extremely weak, and the dollar and Euro made an outside reversal on Thursday with follow through as Euro quickly surged from 1.21 to 1.24 from a Fibonacci turning point. Currently EURUSD is near critical resistance which, if broken, portends even more multi-year cyclical highs for EURUSD (remember, there is no such thing as a triple top so that 1.255 double top will eventually break if touched again).
      And numerous (smaller) Asian currencies are even stronger against USD as that’s where most of the real growth is. And some of their central banks are actually promoting currency appreciation (eg., Malaysia and Thailand where growth has been as high as 17% lately)… Proving that rising currencies AND real “normal” interest rates can still co-exist with (and perhaps even facilitate) growing economies.

      My understanding is that large sums of capital have been moving from US to Japan by corporates, the Japanese and investors. When that turns, then dollar-yen may turn?

  3. Peter M Todebush Says:

    Trump is a ‘disrupter’. He ignores all protocols. This unorthodox approach drives everyone crazy. That is why they hate him besides thinking he doesn’t know what he is doing.

  4. Stefan Jovanovich Says:

    Yra is right about the parallel with Cold War defense spending, but I think a better specific analogy is Eisenhower’s first term. The spending for the Korean War was more of a fiscal shock than Congress’ decade plus of CR budgeting has been. The Fed had to abandon being the Treasury’s bitch and anti-communist absolute embargoes – against eastern Europe, Russia AND China – were a far greater protectionist measure than our histories bother to mention.

  5. Econosums Says:

    Yra; Trump is what he is but he came in to do and fix. His method is to at first disrupt, demand and then negotiate. He is Trump. It isn’t that I like him, but I think he is more honest and has more cajones than all the rest of em.

    • yra harris Says:

      Econosums–please don’t think I am being political with my analyses—I am not–I take a non-partisan view because I care not a lick about labels.I mirror Deng Xiao Ping–i don’t care if the cat is white or black as long as it catches mice

      • Stefan Jovanovich Says:

        C,mon, Yra. Lerner was a political partisan, like you; and, like you, he never let his politics distort his economics. It’s OK to find Trump as maddening as Adlai Stevenson and Murray Kempton and all good Northern Democrats found Eisenhower.
        If only it were a question of catching mice. Deng Xiao Ping is appointing himself ProConsul for life because China is now a mercantilist empire with a currency that is being quietly clipped even as its cities model Augustus’ Rome and go from brick to marble. The Chinese cannot defeat the Americans in a war any more than the Roman Army could defeat the Parthians; and, as you noted in your remarks about NAIRU and Nehru, the Indians offer the impossible challenge of being permanently lower cost labor than the Chinese can ever be. No wonder they now look to become Pakistan’s new best friend.

      • yra harris Says:

        Stefan–non-partisan to the core a true libertarian in mind spirit and anlaysis although as Asherz points out well–Scumpeterian is acceptable but i don’t dress as a dandy–as my wife complains my wardrobe is creative destruction

      • Stefan Jovanovich Says:

        Libertarian thinking is wonderfully partisan, Yra. You all just don’t like to be reminded of it. There is a Hobson’s choice that political economy always offers: open migration or open trade. (I do not use the word “free” because like Scumpeter’s choosing the word “capitalism” it is a self-evident misnomer. You cannot understand enterprise in Marxist terms, and nothing – not even the air we breathe – is free.). Until 1914 the U.S. had open migration and tariffs and gold coin as legal tender. Thereafter, it had closed and then open migration and managed trade. It was impossible to distinguish the effects of that fatally (for the US) muddled policy until the world physically recovered from the wars of empire that made the 20th century a literal Holocaust. Bretton Woods had no more practical consequence than the 1920 Naval Treaty. As Europe and Japan and then China have recovered from the devastation and murder that are the special gifts of Caste and pure Marxist thinking, the costs of the muddle in U.S. political economics became obvious. It should hardly be surprising that Gary Cohn and Lawrence Kudlow fail to see them; they are both absolute believers in the religion of managed currencies and “free” (sic) markets. What is wonderfully surprising is that Peter Navarro actually gets to be heard and listened to by the President and Jay Powell thinks central banks in a fiat currency world should protect the national Treasury by not managing the price of the currency. Wonders abound.

  6. Mike Temple Says:

    JPY is set to SOAR. Beyond the reasons you cite, Japan is running a trade surplus of 4% of GDP and the trade weighted yen, per Westpac, is cheaper than it was back in 2007 when yen began its 5- year run to 75. I think JPY will surprise EVERyBODY with its strength this coming year and next. And that is before all the Trumpian effects and policies

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