Notes From Underground: Like Holden Caulfield, I Digress

As the Italian political situation maintains a boil, the elites of the Davos clique are out in full force trying to calm markets. The only problem is that established elites are so removed from reality that every move they make results in more turmoil. The airwaves were full of establishmentarians portraying themselves as conciliatory but their analysis of the economic consequences of the Italian election outcomes are similar to Ben Bernanke’s claim that the housing crisis was contained in early 2007. Let’s review some of today’s inane comments and analysis:

1. Italian President Mattarella exercises his presidential authority, and overrides the wishes of the winning coalition by blocking the appointment of euroskeptic Paolo Savona as finance minister. The result was/is that 5-Star/Lega coalition will push for a new election and threaten the removal of President Mattarella by parliamentary vote. In an effort to override the popular mandate of the coalition, Mattarella selected Carlo Cottarelli to form a caretaker government. The selection of IMF technocrat is everything that the Italian electorate despised. Cottarelli is a second-coming of another Brussels-chosen leader parachuted in to calm events.

Mario Monti was selected by a sitting president to replace the highly despised Silvio Berlusconi in 2012. The elites selected Mario Monti but failed to gain popular support and thus proved a short-lived filler. Mattarella’s arrogance resulted in market turmoil as Italian yields rose in dramatic fashion. BTP yields rose 50 basis points while two-year Italian notes rose by 186 basis points. Hey buffoons, arrogance has a price!

2. The second piece of supreme arrogance was from a speech given by George Soros (coupled with a piece he wrote for Project Syndicate). Soros claimed that Europe is on the verge of an existential crisis for the euro and its financial system. Soros laid out a three-pronged theory for the current crisis in the EU: refugee crisis, territorial disintegration and the continued austerity policies promoted by Germany, the Netherlands, Austria and Finland.

From my perspective, the problem is that George Soros bears a great deal of responsibility for the current crisis because of his continued efforts to push for a EUROBOND, despite the reservations of those EU nations that would be the responsibility of being the credit card for massive piles of European sovereign debt. In an effort to synthetically create a EUROBOND the ECB has amassed a gigantic balance sheet that would be too large to fail and thus be folded from many different sovereign bonds into one: E Pluribus Unum.

As I have discussed for several years, the repression of German savers has done more harm to the German political system than any refugee issue. George Soros is a PHONY in projecting his three-pronged argument on the present situation of Europe. His denial is a concept of reflexivity in that Soros’s three elements of crisis are no more fact than my supposition about financial repression and its malevolent outcomes. But in a true test of my discussion with Rick Santelli, Italian yields were undone by politics and the benefits of a sound German alternative. As Italian YIELDS have risen German yields have dropped dramatically. Quite reflexive in the quest for genuine analysis, not political expediency.

3. The epitome of arrogance today was courtesy of German politician and European Commissioner for Budget and Human Resources, Gunter Oettinger. He stated in a television interview that “markets will teach Italians to vote the right way.”

Holden Caulfield, where are you? This statement was beyond the height of arrogance and this will provide more support for the Five Star/Lega coalition as the titans of Brussels taunt the Italian electorate. This vile comment reflects more on the stupidity of the eurocrats and the feeling of the popular mood. What is more astounding is that the Italian bond market turmoil is having just as much as an effect on German financials as Deutsche Bank, the crown-jewel of German finances, is threatening to hit its lowest closing price ever.

The arrogant need to realize that the financial fallout from Italy is far greater than most talking heads and politicians want to believe. CNBC has been full of analysts hawking European financial stocks for several years (knowledge masked as arrogance). The situation in the euro zone has deteriorated to such a low level that even Paul Krugman tweeted today: “This is really awful: you don’t have to like the populist parties who won a clear electoral mandate to be appalled at the attempt to exclude them from power because they want a eurosceptic finance minister.” This was followed by a second tweet: “Faith in the single currency trumps democracy. Really? European institutions already suffering lack of legitimacy due to democratic deficit.This will make things much worse.”

But then I digress, or am I only being reflexive? The bigger question remains: As I said on Friday’s Santelli Exchange, will President Draghi try to inflict financial pain in order to sway voters away from Five Star/Lega? Digression, indeed.

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9 Responses to “Notes From Underground: Like Holden Caulfield, I Digress”

  1. kevinwaspi Says:

    “existential crisis”. I believe my Webster’s has a picture of George Soros next to that definition. As for Holden Caulfield, he may be getting ready to say to the elites of the Davos, “It’s such a stupid question, in my opinion. I mean how do you know what you’re going to do till you do it?”

  2. Marti M Says:

    Without Draghi, Eurozone country debt instruments will have no bid. Big reset coming despite doing “whatever it takes”.

  3. Mike Temple Says:

    Hi Yra
    It is difficult to see how Europe escapes a tumultuous summer.

    Who does Brussels talk to or negotiate with while the Italian political state is rudderless?

    Unless Lega and 5 Star come out and publicly proclaim they are for the Euro, who is going to buy BTPs?

    Last time around in 2011/2012, BTPs reached 7%+. Today, that would be another drop of 25 bind points for the 10 yr BTP.

    The Eurocrats are truly tone deaf. The populist fervor behind Lega and 5 Star is more virulent than Trumpites and now they are witnessing a hostile takeover/rejection of their own plebiscite by the jackboots of Brussels.

    This can get a whole lot worse. My favorite them has been watching the “red” EDs. The Deferreds SOARED today. Spread between front month and Dec 2019 is now just 40bps, in roughly 32 bps in just 6 trading days.

    Mr Market is looking at Italy and is calling “BS” on the Fed dot plot—-now pricing in LESS than 2 full 25 bp rate hikes after the June hike….

    I think the action in US yield curve is far more indicative of the troubles ahead than the paltry drop in stocks.

    Mr Draghi et al would be well advised to take note of what capital markets are doing after this “Italian Job” this weekend.

  4. asherz Says:

    It looks like the Maastricht Treaty will have a shorter shelf life than the Peace of Westphalia. Just as Bernard Connolly who authored the Rotten Heart of Europe was suspended from his profession for being prophetic, suspending the outcome of a democratic vote won’t save the Euro or the EU. Tribalism is a stronger human impulse than Soros’ view of globalism. America First won an election that few predicted.
    However with the derivative market in the quadrillion category and with counter party risks that cross all borders, the Davos elites have created a monster that will spare very few.
    Now how do you build that ark?

    • Yra Says:

      Asherz—was it cubits or was the translation misread and really BITCOINS Denominated in zahav?

    • AZRondo Says:

      Just spoke with a friend near Asheville NC and rains heaviest in 55 years… I can’t worry about the the cubits, nor BC’s since haven’t been given the call to build an Ark… Yes, it is the slime across all borders in counter party risk that is potentially the most damaging – good call.

  5. Arthur Says:

    Bravo Yra!

  6. David Richards (@djwrichards) Says:

    Polls consistently show that Italians overwhelmingly prefer to keep the Euro. Sentiment surveys like DSI show dollar bulls were 97% long USD yesterday. Expect the Euro to gain more against the bear market dollar, albeit not in a straight line. Italy overblown not unlike the fears over the French election last year. On balance the majority of Italians, like the French, probably have no stomach to seriously rock the boat, at least for now, which is maybe why the elites act as they do.

    • yraharris Says:

      David—it is all a process and in my opinion the Italians are following some of the thought of Yanis Varafoukis but with a greater sense of where their leverage is—we will see

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