Notes From Underground: Volatility Will Remain in Financial Markets

First,I have the extreme pleasure of participating in another PODCAST with Richard Bonugli at the Financial Repression Authority. It is always a pleasure to “JAM” with Peter Boockvar in an effort to discern the rhythms of the global financial system. Peter, along with Jim Bianco, are two of the best analysts covering the entire rubric of money flows being impacted by the data. Enjoy the exchange and remember that this recorded on Tuesday, October 23. There was a great deal of volatility and data after our podcast, but much of it is relevant heading into this week’s trading.

As I have discussed for the last three weeks, under the guidance of Chairman Jerome Powell the CAVALRY is not coming to save those who have applied too much leverage to enhance their returns. For those waiting for the cavalry I suggest learning to whistle Garry Owen. This market will benefit from low interest rates but it will realize that the excessive liquidity available for any “quality” investment will be severely minimized as the Fed’s balance sheet shrinkage is larger than the ECB or BOJ’s QE programs. This theme will continue as long as Powell sits at the helm of the Fed.

***In reviewing Thursday’s ECB decision and Draghi press conference, I offer these two takeaways for traders and investors. The first is that Draghi is pushing hard for the EU to sustain the rules of the Growth and Stability Pact (Maastricht Accord), but stresses that Italy is a fiscal issue and must be dealt with through fiscal reform. Draghi acknowledges that the MONETARY UNION is FRAGILE if not completed. This is why there’s a need for a banking union and European budget to deal with infrastructure needs, but this is an apolitical contingency. The best question of the press conference was: “What would happen if Italian Debt was downgraded below investment grade?” Draghi was adamant that the ECB Board did not discuss this WHAT IF and therefore would not speculate on such an outcome. This is pure nonsense from Draghi as he stressed that markets and policy makers had to prepare for the possibility of a HARD BREXIT. Prepare for one but not the other? THAT’S NONSENSE OF THE HIGHEST ORDER.

Secondly, pay attention to the CAPITAL KEY as adjustments are made respecting the changes in growth percentages and ancillary impacts from the U.K. moving outside the current structure. The capital key will prove to be badly flawed because of the German insistence on fiscal frugality. The scarcity of high quality liquid assets will continue to widen the spreads on German debt versus all of the other EU nations, including France and Spain. This is a significant element of the trap President Draghi has laid for the ECB.

***On Sunday, there was a German election in Hesse. This is the second consecutive regional election in which Merkel’s CDU has experienced a large drop in its popularity. The two mainstays of German postwar political stability are both losing voters as the GREENS gain on the left while the Alternative for Germany (AfD) continues to reach the hurdle for representation in Parliament. The Financial Times reported the news with a ridiculous headline: “Merkel’s CDU Humbled in German Regional Vote.” If Merkel hasn’t already been humbled by several political losses then the German polity needs to replace its arrogant leader.

It is Merkel’s weakness, perceived or real, that complicates the Italian situation. The Five Star/League coalition knows that they can be strident in its budget negotiations as a weakened Chancellor Merkel prevents the imposition of the fiscal austerity policies favored by the Germans and Dutch. There is more ambivalence in Brussels and Frankfurt as they attempt to deal with the demands of the Italian coalition. Volatility has many progenitors.

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12 Responses to “Notes From Underground: Volatility Will Remain in Financial Markets”

  1. Trader 1 Says:


    With Mekel not seeking reelection do U think this increases/decreases chance of EU Construction Bond?

    Any other thoughts on how Merkel might use her last few years to go out as ‘hero’ to EU??

  2. yraharris Says:

    Trader—good question and my first thoughts it will be an impetus for Macron to seize the mantle of leadership and create a build Europe infrastructure bond—remember that Napoleon was 35 when he was made Emperor —Merkel should leave the scene and if not the cowards in the SPD should force a dissolution of Parliament by leaving the coalition and force the issue—-but Italy and France would both enjoy a period of fiscal stimulus—-

  3. Trader 1 Says:


    Thanks for taking the time to answer my questions. Your 2+2 gets me thinking of ideas which I may not have thought of.

    You mentioned in one of your videos you do it as a way of giving back. With computer screens it leaves a huge void to the old days when there were mentors. I had forgotten how much I had learned from those ‘old time’ traders/mentors and phoned one up to say thank you.

    Hopefully one day I will run into you on the street so I can personally thank you.

  4. margo ranger Says:

    This podcast was a very important one — lucky are those who make it a habit to listen to Yra — and Peter!

  5. GreenAB Says:

    Trader1: Germany here. 😉

    As of now there are three big candidates who might succeed Merkel as CDU chair. The outcome of this process (convention in December) will decide, how much Merkel will be doing as chancellor.

    If either Friedrich Merz (still not official, but strong rumors) oder Jens Spahn win out, expect Merkel to resign within months. Both are Merkel critics. Both stand for a much more conservative CDU.

    If Merkel´s hand chosen successor – Annegret Kramp-Karrenbauer becomes chair, then Merkel will probably stay until 2021 and she might continue her agenda.

    If i had to guess right now – Merkel will be out of office shortly.

    • yraharris Says:

      Green Ab–thanks for remaining an important piece of this effort over the years.We knew she was wounded years ago Tomorrow night I will cover what Niall Ferguson discussed about her but I believe it wa an act of arrogance to remain in office and if the SPD had any backbone they would pull the plug on this coalition for they are worse off then she is by remaining with such an obvious parnevu of the political persons of Germany.

  6. Rob Syp Says:

    Carter Worth technician puts S&P 500 into perspective

    2532 low this year 2500 and 2300 areas of interest

    • David Richards Says:

      Carter says 2100 is also of interest. I’d expect so too, later. Note the midrange area of his channel has already touched and bounced, as we’d expect, whether the bigger picture is the start of a long bear market or merely a multi-month correction. Either way, there was the first wave down to midpoint, to be followed by a substantial wave up to retrace part of all of the downdraft (new high is permissable as it’s a B wave), then the third wave down toward the bottom of his channel (or below if it’s a new bear). I favour the down-up-down correction path for now. Accordingly, the dollar had been up, and now should go down, then up. The critical 1.13 EurUsd point has held and bounced strongly, so far, as have stocks. However, there’s no certainty as many professional market participants are all looking at the same thing, and instead the market usually likes to do something different to fool as many as possible.

  7. Rob Syp Says:

    Deficit swells not only this year but projections are TRILLION $ deficits for years to come. Question would normally be when does it end but it’s just beginning…

  8. Chicken Says:

    I presume the deficit has reached the point of no return? Seems inevitable considering the Pentagon budget alone is a colossal monument and testament to waste.

    Wake me up when Maureen McGovern sings.

  9. Rob Syp Says:

    Wish I could pull up the video it’s not available but here’s the transcript of Andy Rooney doing a piece on “Ike was right about war machine” about the amount of money our country spends on military more then the whole world combined every year…

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