Notes From Underground: Irony of Irony

President Donald Trump maintains that the Facebook, Google, Twitter bias is the “real collusion” … oh wait, he tweeted that. Seriously, nobody spots the irony?!? Every day, this madness infects the algorithmic condition of the markets. I prefer real intelligence instead of artificial intelligence for genuine intellect understands nuance and irony. (Again, this is not a political statement as we analyze all aspects of politics in an effort to secure profits in global financial, commodity, currency and equity markets.) As Deng Xiaoping would say: “It doesn’t matter whether the cat is black or white, as long as it catches mice.”

It has been more than a week since the last blog post. As Trump’s inner Nixon spills outs, we will continue to monitor the idea of a MASSIVE GLOBAL INFRASTRUCTURE effort, especially since there’s a G-20 meeting in Buenos Aires the weekend of November 30.

There is so much consternation in global affairs that world leaders will be eager to find some agreement in which to provide a backdrop for a communique. Every nation is eager to support the need for global growth. Japan recently raised the issue of increasing its infrastructure spending, even as it’s hosting the Summer Olympics in 2020. The eurocrats in Brussels have been pleading for a massive infrastructure program but have been rebuffed by the fiscal conservatives in Germany and the member states of the new Hanseatic League. The Chinese are even flirting with the idea of government-based stimulus to support a slowing economy suffocating from its debt and capacity burdens. Russia’s state coffers are full as the recent strength in oil prices and a very weak rouble have been a fiscal boon to President Putin. Most importantly, the U.S. is weighing its own infrastructure plan, led by a president who has never met debt he didn’t like.

The success of the Democrats in the 2018 mid-term elections will allow Trump to find some comradeship with the new House leadership. Some analysts may balk at a potential Trump/Pelosi ENTENTE but I offer this thought: Can the Democrats afford to further alienate its traditional blue-collar base by stonewalling a massive infrastructure program? Not a chance, especially since they will likely push for minority firms to be recipients of FEDERAL CONTRACTS. Trump is no fiscal conservative and while the Democrats will be reticent to allow Trump to put his name on this massive spending effort, the need for the Democratic House to take the lead on its funding is too significant to be bogged down in politics.

There will be indicators to watch:

  1. Copper prices for a global build will put huge upward pressure on copper stockpiles;
  2. ABB, FLUOR, and JEC, which do project engineering should also provide a look ahead;
  3. The U.S. and other large spenders OUGHT to see yield curves steepen as fiscal austerity is sacrificed on the altar of political expediency;
  4. Commodity prices across the board OUGHT to get a bid as investors seek all sorts of alternative investments to protect against government malfeasance;
  5. Maxine Waters will join the chorus criticizing the FED for raising rates too aggressively, but these massive projects will put upward pressure on WAGES in an already tight labor market. However, Rick Rieder of Blackrock had an article last week arguing that wage increases are not inflationary; and
  6. A critical piece will be from Europe where there will be great pressure on Germany to open its pocketbook to help fund a substantial infrastructure program which will help alleviate the acrimony between Rome and Brussels.

It is critical to acknowledge that German banks have SIGNIFICANT CREDIT EXPOSURE to Italian banks. Also, President Trump can increase pressure on Germany with the threat of auto tariffs. Chancellor Merkel is in need of a positive outcome to salvage her image as the leader of the FREE WORLD. In a Bloomberg article Thursday by Alessandro Speciale, ECB researchers Dedola, Georgiadas, Graeb and Mehl found that the Draghi QE program has WEAKENED THE EURO BY 12%. This is fodder for the Trump White House. The key to a European infrastructure program will be the issuance of a EUROBOND, which will begin the process of unifying European financial markets. The markets will tell me is the theory has credibility. Do your TECHNICAL ANALYSIS and let the money talk while the B.S. walks (as always).

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20 Responses to “Notes From Underground: Irony of Irony”

  1. Tader 1 Says:


    What odds would give for your Global Infrastructure Plan being announced at G-20?

  2. David Richards Says:

    Overall, this should be quite dollar negative and positive for currencies and international assets, except for bonds. The dollar recovery of late has been clearly *corrective*, because the dollar has chopped higher on the chart with overlapping waves up & down, in contrast to the clean impulsive down waves beforehand (bigger amplitude and much less overlapping) that the dollar charted for 14 months before its current upward correction. Some commodity currencies, except the loonie, have begun acting better recently as have select EM currencies. Either the worm has already turned or will turn next year (after one more dollar thrust higher in C to complete a classic ABC correction higher?). Plan to re-position accordingly. US assets probably aren’t the best place to be in the midst of a reflationary global infrastructure spending spree if that indeed materializes.

    I dunno who’s gonna buy the debt that finances such a spending spree? Bond markets have already looked queasy this year without such largesse.

  3. David Richards Says:

    “Maxine Waters will join the chorus criticizing the FED for raising rates too aggressively”. It appears new Fed Vice Chair Clarida has begun that bidding for her and Trump, as Clarida came out very dovish on CNBC today, talking about room to run in labor markets, evidence of a global economic slowdown, the need for the Fed to be data dependent, and sounding not at all on board with the current rate hike per quarter program. And *crash* went the dollar. Weekly key reversal (bearish) on the dollar chart if this holds for the day.

    • yraharris Says:

      David—thanks for the posts –hoping to get there as Clarida said some interesting things especially in regards to the global situation—there is more then a dual mandate

  4. yraharris Says:

    From Yra—for the record the CEO from VIRTU making my case and even the fast money guys are making it –six weeks after NOTES blogged about it–Sorry to blow my horn but it gets old especially when several of the commentators read the blog

  5. Mike Temple Says:

    Any such successful communique could/should propel stocks to rally hard into year end, especially after Shocktober

    • David Richards Says:

      Mike, the dollar fell more than all stock averages rose yesterday and that can continue should stocks “rise” under a debt-funded, currency devaluing profligate spending spree. So US stocks are a loser in that scenario relative to other (real?) assets, like we’ve seen before when they devaluate. Now more than ever, as USD has become a carry currency. It they back off from the promised carry increase, foreign investment will flee dollars and USD will tumble, morphing any positive nominal returns in US stocks to negative real returns, which to rub salt in in the wound you must pay tax on.

  6. Chicken Says:

    Great summary. Left my pea-brain wondering how quickly ratings agencies downgrade EUROBONDS to junk, lol.

    • David Richards Says:

      Not the ratings agencies or banks in Europe, lol. But no worse (or better) than some major US ratings agencies a decade or so ago for which some AAA / AA+ rated products fell to zero.

  7. Mike Temple Says:

    In the long run, you may be correct. But for here and now through Xmas, a nice Santa rally could be had with some positive spin coming out of G-20

    • David Richards Says:

      Yes Mike, stocks could continue to enjoy a reaction rally near-term, esp selective internationals, not just US (and in the US, not just FAANG). A weakening dollar and easier financial conditions is a key to all this for me. If instead the dollar makes a run higher toward 100+ (not even as high as it was just last year!) on a less dovish Fed, then no rally. But instead the Fed has apparently blinked again, as there are reports of a handful of FOMC members including Powell backtracking their words about more hikes and a higher neutral rate etc (which per Volcker can’t be realistically gauged anyway). This Fed, like the last one, still keeps an eye on stock levels and international conditions (ones bigger than Turkey and small southern hemisphere economies) as part of its unofficial mandate. So, little has apparently changed since the Yellen Fed, except now they seemingly tolerate a bit more market pain before reacting, but just a bit. We’ll see as you say, “in the long run”.

  8. Michael A Temple Says:

    Yes, the “long run” to me means 2019…And everything will come “a cropper” next year, in my view.

    Your comment about Fed keeping watch of the stock market makes me chuckle….Not at you, but at the Fed

    Credit markets are where the big problems lie. As Yra has highlighted many times, the Fed solution to the 2008 debt crisis was to layer on more debt…US economy has seen debt levels rise from approx $20Trillion at Lehman to over $30Trillion now….

    We have felt no pain due to furious rate cuts and the extraordinary actions of QE and alphabet soup agencies that created liquidity and backstop to the system.

    Now, we are seeing real credit woes begin to develop GE implosion is just the main headline. Here are other major developments that most mainstream financial sites are missing (and I fear the Fed are missing, too)

    1. Per Moody’s, the BBB sector of Inv Grade has never been larger since the 1981 recession….$2.8 trillion of such debt now exists and the likelihood of falling angels hitting Earth in 2019 is quite large.

    And this is happening while the economy has never been better.

    2. Spreads are beginning to widen….In the past week, per Moody’s, HY spreads gapped out from +371 to 415….44 bp…Equivalent to two Fed tightenings….What happens when HY gaps out by hundreds and hundreds of bp…..Does the Fed not see/monitor this “market tightening”?

    3. FDIC Chairwoman Jelena Williams gave a very chilling presentation recently in which she highlighted that there have been ZERO bank closures so far in 2018….Never before has this happened in recent memory. She expects this “new abnormal” NOT to continue. She is especially concerned about problems in the commercial lending markets where developers are soon to be likely to turn back the keys to lenders as many recent projects have been financed at record low cap rates while taking out mostly floating rate debt which is now 200 bp higher than just 2 years ago…..Many projects simply do not work/pencil out.

    Death and destruction? No…But bad credit losses are about to hit the banking sector….The same phenomenon is taking place in levered finance where so many CLOs simply no longer “work” with higher rates.

    4. Finally, the chart of the spread between Libor/Euribor has reached “crisis levels” last seen preceding the great Lehman implosion of 2008.

    It is these developments that should be guiding the Fed towards pausing, and NOT the recent stock market volatility.

    $30 Trillion of US indebtedness that has beholden to an unprecedented era of QE steroids has started to wobble despite the “greatest” economy in recent memory..

    2019 is just around the corner….Through year end, I still agree with Yra…..A possible Xi/Trump deal could send stocks soaring….Or, if Fed actually says “We pause” in December, stocks also soar.

    But, it will be a rally to fade//sell big time.



    • David Richards Says:

      Mike, excellent 4 points TQ. “It is these developments that should be guiding the Fed … and NOT the recent stock market volatility.” You’re right, of course, and I must imagine they’re watching those?
      Thus maybe the recent about-face by four Fed guys and Powell. The dollar is already down a lot in a week and it’s now sitting near a level which if broken (as I expect will likely happen, possibly after a small bounce first), should bring a bigger wave down. Not that there aren’t big problems elsewhere too, it’s just that the narrative had been painting the US circumstances and dollar as stronger than they really were; any dashed rate expectations will take a toll on the currency, until that sentiment exhausts and shifts to something else.

  9. Michael A Temple Says:

    And yet, strangely, gold still meandering….For how much longer?

    Happy Thanksgiving


  10. A.M. Look 11/16/18 | Says:

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