Notes From Underground: Markets Are Rounding Third and Sliding Into Home

As we head into the final two weeks of the year, the global equity markets are “sliding into home.” Equities sold off again on Friday as the Chinese tariff saga is failing to provide support to the market. Weekend news conveyed the idea that the market was reacting to this week’s FED meeting and the very high probability of another increase in the central bank’s target range. This is a stretch because investors have been aware of the FED‘s limitations under its own “forward guidance,” trapped into a rate hike for fear of spooking the market if no increase was decided.

It is a great failure of the FED‘s forward guidance policy that calling off a rate hike WOULD DO MORE HARM TO MARKETS THAN AN INCREASE IN THE FED FUNDS RATE. (I call it the ultimate prisoner’s dilemma for the game theorists populating the FED‘s research centers.) The most important outcome with the FOMC statement will be if the central bank sends dovish signals by acknowledging the global slowdown. That has been the reason that all other central banks have left rates unchanged (SNB, ECB, BOJ, RBNZ, RBA, BOC). The only bank that has raised rates is the Russian central bank (which they did on Friday).

The FED says very little about global conditions, which is incongruous being that the DOLLAR is the world’s reserve currency. Whatever path the FED takes has far greater impact upon the global financial system and yet the U.S. central bank remains very restrained in commenting on global economic conditions. If Chairman Powell is searching for grounds to lessen the possibility of future rate hikes, the STRONG HEADWINDS FROM A SLOWDOWN OF GLOBAL GROWTH provides the perfect rationale.

***There was an important news pieced over the weekend, which said the World Economic Forum (also known as DAVOS), has decided to allow three heavily sanctioned Russian businessmen to attend the most expensive cocktail party in the world in January, reversing an earlier decision. Oleg Deripaska, Viktor Vekselberg and Andrei Kostin have been invited, thus putting a chink in the U.S. sanction strategy. The sanctions are hurting Russian business but the massive energy to Germany and other EU nations render the overall sanctions farcical.

It will be important to watch if the U.S. pulls back from official involvement in Davos or the change in the attitude was cleared with the U.S. Treasury. Many have warned the U.S. that they are relying too much on sanctions in an effort to punish nations not compliant with the desires of American foreign policy outcomes.

***Readers of NOTES have been apprised of the European debt crisis for many years and know that the theme of the ECB being trapped by its QE and Negative Interest Rate Policy (NIRP). A long-held view was that while Jeff Gundlach and Bill Gross were saying that the German bund was a GREAT SHORT PLAY, NOTES advised being long the bund and short the French OAT for a very conservative play on the poor outcomes of the ECB program. Recently, the BUND/OAT spread has widened out to 47 basis points as investors are nervous because of the political violence propagated by the “yellow vests.”

The poor outcome for bond investors was elevated when President Macron capitulated to the demands of the Yellow Vests, rescinding the recently imposed fuel taxes while also increasing government expenditures. French President Macron’s decision has pushed the country’s budget deficit over the Maastricht-imposed restriction of 3 percent. This is a dangerous position for France to take while Brussels is simultaneously criticizing Italy for a budget deficit of 2.4%. The EUROCRATS in Brussels maintain that the French situation is far different from Italy. Pierre Moscovici, the EU economy commissioner maintains the situations are totally different: “The European Commission has been monitoring the Italian debt for several years;we have never done that for France.”

Furthermore, a French Treasury official maintains “the situations in Italy and France are not comparable. Contrary to Italy, we do not question European rules. We agree that having public finances in order and reducing public debt are the right thing to do.” The arrogance expressed by EU officials will not sit well with Rome. Europe will continue to harm itself as it confronts the pushback to Brussels and the ECB.

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13 Responses to “Notes From Underground: Markets Are Rounding Third and Sliding Into Home”

  1. Bellino Says:

    Italy plays the part of San Sebastiano with its hands tied behind the euro pole, while the denizens of the ECB and Brussel nomenkaltura shoot arrows into the italian political economy for fun and profit.


    • yraharris Says:

      Bellino—you have summed it up well.The German/French connection acts with supreme arrogance and the pushback is gaining strength.the Germans are fooling themselves if they fail to comprehend who is the ultimate creditor for the entire project

  2. Peter Says:

    Oligarchs at Davos? The sanctions against Russia are a warning to China and India that the US will overextend US dollar dominance. As a result, Obama and now Trump incented a more competitive and Asia looking Russia and the Silk Road strategy of China.

    • yraharris Says:

      Peter–yes I think you strengthen some competitors when you pile on needlessly–your point is well taken.the sanction model does not make room for the dynamic nature of alternatives—-

  3. Jim's Mailbox :: Jim Sinclair's Mineset Says:

    […] More… […]

  4. Richard H Papp Says:

    On a Dow Theory reading of the Industrials and Transportation Average a change in trend from Bull to Bear was indicated on Friday’s close. On the other hand, I came to the same conclusion in the late spring of 2017. But the follow thru proved me wrong!

  5. Rob Syp Says:

    Tom Friedman was just on CNBC and was in Paris recently, He talked the whole enchilada MBS, China, Brexit, Italy, France, Gernany and Trump. He’s most concerned about the EU moving forward.

    • yraharris Says:

      Rob–I have very little respect for the thinking of tom friedman whether he agrees with me or not.He is arrogant and when he says that we can’t possibly know what he knows because of his high level of access to those with high security clearance—yes I actually was at a speech he delivered we he said that—lost all respect–the only flat is his analysis

      • Chicken Says:

        I’ll back Yra up on that, reading enough of Friedman (a few weeks following his drivel) brought me to the same conclusion.

      • Rob Syp Says:

        See you learn something new every time Yra writes and comments….

  6. Chicken Says:

    “Sliding” is certainly an apt description. Definitely not an exaggeration, either.

  7. Mike Says:

    Has the Fed always given guidance or was there a time when they were quiet as you describe (new to this forgive my ignorance) they are today?

    • yraharris Says:

      Mike—no forward guidance I believe came with the Bernanke Fed and followed the academic work of Michael Woodford.Remember,Greenspan loved his role as the Oracle and famously said in an interview–if you think you understood what I said you must have misheard—hardly forward guidance

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