Notes From Underground: Is April The Cruelest Month?

As T.S. Eliot warned in The Wasteland, April is the cruelest month, as the thaw of winter gives way to hope as the world returns to rejuvenation. April has delivered the first quarter corporate results and it is no exaggeration to state that revenue and earnings have exceeded expectations. However, the equity market results have failed to respond to the robust numbers as the SPOOS have gained a mere 1.25% and remain unchanged on the year. The NASDAQ 100  has been a much better performer as the TECH sector continues to cruise.

My thesis going into May is that the SPOOS are struggling in spite of enhanced earnings as short-term interest rates in the U.S. are perceived to be a drag on future earnings and possibly economic growth. In a bow to the cost of money, the DOLLAR had a positive month, gaining almost 2%, as short positions have become more expensive to fund. Gold, in dollar terms, is unchanged on the month in defiance of conventional wisdom as higher short-term rates have not yet brought a liquidation of the precious metals.

The continued efforts by the ECB, BOJ and Swiss National Bank to keep their overnight rates at crisis-era levels is increasing concerns around the globe that central bankers in general do not have an exit strategy. ECB President Mario Draghi’s press conference on Thursday was a piece of obfuscation worthy of a teenager being interrogated by its parents. The EURO currency succumbed to the unequivocal dovish stance of President Draghi as he maintained that risk in Europe remains elevated. When a Handelsblatt reporter kept asking why the ECB had no road map out of the emergency measures that it implemented, Draghi answered that the ECB did not even discuss monetary policy at the meeting. WHAT? President Draghi made certain to present headwinds pertinent to the ECB: Fear of rising tariffs; the inability of European governments to devise a plan for unified risk sharing; and, of course, the continued failure of the EU to embark on a plan for fiscal stimulus.

As Draghi stressed when discussing the rise in U.S. yields: “Increase in yields in the U.S. to be expected because of differences in business cycles and the fiscal expansion recently enacted. Plus, U.S. at 4% unemployment.” Mario the Magician should be reminded that the ECB does not have an employment mandate, as its only “concern” is inflation. The problem is with no harmonized fiscal program why should a unitary inflation number be the key data point? Germany, the EU’s largest economy, is running inflation above 2%, which is crushing the German savers. But as Draghi insisted, monetary policy will require a steady hand to ensure PRUDENCE, PATIENCE and PERSISTENCE.

Chancellor Merkel’s visit to the White House further highlighted the issue of the EURO ownership. When President Trump lays criticism upon Germany for its massive current account surplus Merkel has little leeway to respond as German corporate interests continue to benefit from a currency way to weak for its economic prowess. The Chancellor cannot raise interest rates to stem inflationary pressures or embark upon any measures to affect the currency it does not directly control. Germany remains an easy target for the Ross/Lighthizer/Mnuchin/Navarro group as it is locked into a fragile situation. Merkel’s fragility was center stage on Friday at the White House. The juxtaposition of Trump’s embrace of Macron to the frostiness of Trump to Merkel is a realization of the German chancellor’s diminished political stature within her own nation and thus Europe. Even knowing the underlying scenario it boggles the mind to continue to see the RIDICULOUS LOW YIELDS that inhabit the charts of various EU sovereign bonds (Spain 10-year 1.26%; Belgium 0.82%; Portugal 1.65%; and Italy at 1.74%).

In my opinion, the continued drop in European yields is the cause of the ECB but the effect is the bundling of BONDS by buyers in an effort to attain higher yields. Mix together some German, Dutch, Austrian paper, and then throw in some Greek and Italian debt. This basically mirrors the securitization of SUBPRIME loans that took place in the U.S. a decade ago. What makes this all the more toxic is that European domestic banks and other financial institutions are encouraged to keep the charade going because global banking regulation makes the SOVEREIGN DEBT A ZERO RISK WEIGHTING. Thus, no reserves required. It’s a feedback loop of dynamic proportions.

Will the rise in U.S. yields be the disrupting force in global markets as cash ascends as an asset class? Will the FED enact its THIRD MANDATE as a the backstop for the global financial system because of the key position of the world’s reserve currency? Something to think about ahead of the FOMC meeting this week.

***An ongoing issue at NOTES FROM UNDERGROUND has been the ALCHEMY of the Swiss National Bank. This blog accurately predicted the breaking of the SWISS/EURO PEG four weeks before the January 15, 2015 day of action and did so with Rick Santelli in December 2014. This year we have discussed the success of the SNB of returning the Swiss franc back to the coveted 1.20 PEG RATIO. The ALCHEMIST AWARD FOR ALL OF HUMAN HISTORY HAS BEEN BESTOWED ON THE SNB.

On Friday, the SNB held its SHAREHOLDER meeting (yes, it’s publicly held) and it was reported in the WSJ that over the last year the price of SNB shares have risen to 7180 CHF from 1760 CHF, actually hitting a 10,000 per share in the interim. While others have discussed crypto currencies I have noted that the Swiss franc is indeed the true crypto currency as it doesn’t have to be mined but printed. It has a much greater green footprint as it uses far less energy. What’s a small forest of trees in relation to the vast amount of energy consumed in the search for ICOS. As the markets begin to FEEL the weight of mountains of debt coupled with higher borrowing rates, we stand in awe of the “accomplishment” of the SNB.

Earlier in the week, SNB President Thomas Jordan, who is a political appointee and not the chairman of the public company, stated that the EUR/CHF at 1.20 was a move in the right direction and that the bank would be in no hurry to change course. Like Mario Draghi, Jordan has no road map out of QE. And why should the SNB seek to end QE? The weaker the SWISS currency, the more profits for the shareholders because the SNB balance sheet is a cacophony of foreign assets.

Print currency. Sell to the markets. Use proceeds to purchase global equities. This is the poster child for the MADNESS of central banking and global finance. (In case there were any doubts as to why 2+2=5.)

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15 Responses to “Notes From Underground: Is April The Cruelest Month?”

  1. Stefan Jovanovich Says:

    We Famistas wish that Yra and the others of the most imortant of all the Chicago Schools – those who gave us the active trading in FX and interest futures – would stop maligning the BEP. They are not responsible for the exponential growth of world credit since the first Southeast Asian War, even when you include the pallets of cash given to the warlords and mullahs. As disastrous as the current bout of official borrowing has been, it has yet to aproach the leverage that was the average for the United Kingdom during the 18th century when the annual interest on the Crown’s debts equalled 4/10ths of the Exchequer’s yearly take.

  2. cdr Says:

    “that over the last year the price of SNB shares have risen to 7180 CHF from 1760 CHF, actually hitting a 10,000 per share in the interim.”

    That’s more of a reflection of the value of Swiss currency than real money. The Swiss are like teens who learned to copy dollars on the home printer and cash them in at the coin changer at the laundromat at night. For some reason, people think they’re cool for doing it. If they keep it up, their national wealth will ultimately be represented by the exchange value of their stash of equities.

    As I said somewhere else, QE is nothing more than eating the seed corn.

    • yraharris Says:

      CDR—-your projection for your end result is probably correct.The wealth of switzerland will be the value of its international portfolio.If it is so easy why doesn’t everyone do this.It is similar to the perpetual money machine of the U.S. Fed—they build a massive balance sheet of U.S. treasury debt and then clip the coupons and pass the “earnings” back to the Treasury filling the gap of an ever expanding deficit.Following the Swiss model the Treasury should just issue more debt and sell it to the FED and collect the annual interest income—simple

      • cdr Says:

        Thinking longish term, I’m serious in that QE is equivalent to eating the seed corn, but on a national scale. If the Fed continues raising rates and the capital base is rebuilt as a result over time, the US will have a massive competitive advantage over all who thought they were pulling a fast one by living off printed money and low/negative rates.We will eat their lunch and make them say ‘thank you’. Again, not next year but sooner than later.

      • cdr Says:

        Also, the print, monetize,repeat plan is the BOJ way. Someday, it will all be written off. After a one week scandal, it will be hailed as financial genius and forgotten. They will do it again unless they have a plan to rebuild their nation’s capital base from scratch with no liabilities to concern them.The Fed won’t be so clean, a possible/likely disaster for another day.

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  6. Michael A Temple Says:

    Cash ascends as an asset class. Your statement is a MOUTHFUL.

    Since the advent of QE back in 2009, cash has been TRASH.

    Suddenly, Yellen and now Powell have (almost) overnight created a new ASSET for investors….CASH

    No less of an investment genuis/god than Warren Buffett has stuffed away nearly $100 BN in 1-year US T-bills as nothing in the M&A world or stock market excites him much.

    Am quite sure there are a few institutional “copycats” out there asking if it is good enough for Warren, is it good enough for me?

    With Fed withdrawing liquidity on the twin fronts of raising rates and removing its relentless bid for securities, we can now add the third leg of the stool that is going wobbly for investors.

    Cash is NOT trash…It is a viable/logical investment with a 2%+ yield that allows you to sleep soundly at night and with LIQUIDITY at the ready to deploy if/when markets go kaflooey as the CBs, as you so elegantly put it, continue to “make it up as they go along”.

    Seriously, SNB should be liquidating as much of its stock portfolio after this masterful FX performance…And yet……they don’t seem prepared to pull the trigger.

    If the CBs never plan an exit strategy, then everything becomes “sand castles”.

    In such a world, give me cash and the PMs.

    Great analysis.


    • yraharris Says:

      Michael–thanks this is the key narrative going forward and will take quite a while to play out .The only concern for me is trading it as the main salesforce on Wall Street will spin its own narrative to promote its needs.The gold/currency crosses will be key indicators to the testing of the thesis.But the SNB is the most amazing financial act I have ever read about.

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  9. Michael A Temple Says:

    You are far wiser and experienced than I (by not too many years, but some). I respect you when you say you think it will take quite a while to play out.

    However, I respectfully disagree. The imbalances are tremendous. And, the systems are no longer working properly as evidenced by the sudden explosion in VOL back in late Jan/Feb.

    So, to think that “all will be well” for the foresee-able future doesn’t make sense to me. Powell cannot stop raising rates at this time….Even a pause in economic numbers can’t be the basis for him to stop/slow down QT…He would lose all cred.

    So, he will continue to tighten (and QT). UST 2/10 is flattening yet again this week. USD continues its “bid”, which is another de facto tightening. And, as you wrote, Powell has made cash an ASCENDANT asset which is slowly beginning to siphon capital out of the casino markets.

    David Tepper gave a talk last week in which he said he is beating the algos handily this year for the very simple reason that the traders who have programmed the algorithms are still living in the rearview mirror world of QE and have NOT adjusted their algorithms to account for this BRAVE NEW WORLD in which we now find ourselves.

    After the VOL–CANO in Jan/Feb, all algorithms should have been re-written, but I doubt they have not….Stick with the one who brought you….David Rosenberg of Gluskin Sheff recently made a similar observation at a Grant’s Conference.

    He says the key number to consider today is 13 Million….That is the number of Wall Street traders/PMs who are hard at work and have only lived their professional lives in the wonder years and have never experienced a bear market.

    So, while you may believe we have many months/quarters to go before the system begins to go “tilt”, I think the structural imbalances are so deep that it won’t take much more “trouble” to set things shaking again.

    No, I don’t foresee another Lehman….But, the fact that the yield curve is once again flattening here this week (2/10 back to 45 after a blow out to 51-52 bps last week) and the USD continues to rally tells me that Powell will continue to raise rates…..Neither good nor bad, just reality.

    That reality is going to continue to stretch the rubber band of all markets….What is the catalyst that snaps it?

    Anybody’s guess is as good as mine.

    Geopolitical? Middle East or NKorea talks fall apart. US withdraws from Iran deal and missiles start to get lobbed up here/there/everywhere.

    Markets? EU troubles? HKD peg stress? Trade tariffs/wars?
    China Indigestion?

    So, while I am not predicting an imminent collapse in risk markets immediately ahead, I do think US markets will soon break by summer under the continued relentless Fed hiking cycle.

    When markets begin to price in a reversal of Fed hiking, especially if it is due to sudden spasmodic equity sell off, I think the USD comes crashing down.

    We shall see.

    Keep up the great analysis.



    • yraharris Says:

      Mike–it makes good headlines to predict imminent collapse as Joe granvile taught us but I will not be a purveyor of pablum but always strive to offer quality analysis that leads to high level dialectic and hopefully profitable opportunities.The central bank fears of of disinflation will be an on going theme .The mideast is a volatile arena and the Russians are now in the cat bird seat which is causing a major sea change—so many concerns but some have investment potential others not so much

  10. Chicken Says:

    Not to mention, the excess of nutrients recharged within the soil. 🙂

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