Notes From Underground: And To All a Good Year

We are heading into the last trading week of the year and it’s setting up to be volatile, to say the least. The FED is in motion. Equity investors are harvesting profits from a long-run bull market. Bond markets are uncertain as how to react to the end of QE since the central banks are now beginning to shrink global reserves (at least the Fed is). Commodity prices are struggling due to the fear of a global economic slowdown. And the political backdrop adds great uncertainty as the Trump administration never misses an opportunity to open its mouth and detract from any policy success it may experience. China, Russia, Turkey, Iran and even Saudi Arabia are watching the Western Democracies to see how they respond to Trump’s efforts to disrupt the current trading system and, more importantly, the rollback of PAX AMERICANA.

There are many concerns occupying all burners as we enter 2019. As it stands, the world lacks the leadership to constructively deal with the many issues that have the market’s attention. Remember, it takes a single spark to start a prairie fire. For those new to Notes From Underground, I will offer up my views about the greatest threats and opportunities in the realm of macro global finance at the beginning of the year.

But already 2019 is providing far too many to list at the moment but I will continue on my concept of this: Be fearful of U.S. debt for the problem remains that we are running a TRILLION plus deficit in a time of FULL EMPLOYMENT, as defined by the mainstream economists. The last time we were at this level of UNEMPLOYMENT during the Clinton administration, the U.S. had surplus budgets and Greenspan was fretting about the end of the U.S. Treasury bond Market. This is the dissonance that hangs over the economic outlook for the United States. As I have frequently opined, real estate is location, location, location while finance is debt, debt, debt.

Many are joining the chorus of warnings about DEBT. Ben Hunt of Epsilon Theory wrote a piece on December 7 titled, “The Dog That Didn’t Bark.” The title is taken from Arthur Conan Doyle’s Sherlock Holmes story, “The Adventure of Silver Blaze.” Ben cites the importance of deficits but raises the concern in typical Hunt fashion. He said, “There is ZERO narrative today around U.S. budget deficits or deficit spending.” By measuring the amount of media references to the trillion-dollar deficit investors are nudged into paying attention to other factors affecting the financial environment. This is the dog that will more than wag its tail next year.

***A warning to the White House: There are many stories this weekend about President Trump desiring wanting to fire Federal Reserve Chairman Jay Powell. On Saturday, Treasury Secretary Mnuchin said “Donald Trump never suggested firing” Powell. Also, “Trump told Mnuchin he did not believe he had the right to fire Powell.” These are all efforts to prevent a major market selloff on Monday. IF DONALD TRUMP AND HIS WEAK SECRETARY OF TREASURY (yes he lacks depth of global finance) WISH TO CRASH THE US EQUITY AND BOND MARKETS THEN CALL TO QUESTION THE INSTITUTION REQUIRED TO SAFEGUARD ITS FIAT CURRENCY. Many pundits are saying such a power grab by Trump would hurt the markets. I will take this one step further.

The BONDS WOULD NOT BE A SAFE HAVEN as the entire question of U.S. credibility would be called. This is a holiday liquidity-plagued market and the damage would be breathtaking upon any such White House action. Think of the enormous positions held by the risk parity trade: long equities, long bonds and possibly short volatility. President Trump, you had better be more forceful than using Mnuchin as an emissary of credibility and financial fortitude. The Department of the Treasury has the task of preserving the integrity of the DOLLAR. It takes more than having the MNUCHIN signature on our currency. In addition, as my daughter Alexandra Harris (and Bloomberg reporter) wrote over the weekend, investors are looking at $131 billion of coupon-bearing debt auctions to close out 2018. This ought to be enough on our holiday plates.
***A joyous holiday season to all and a Merry Christmas to those who celebrate. A Healthy and Happy New Year to all my readers and listeners. I am going to take some time off to visit with my newest grandson, who was born December 20, but while I am enjoying please go back and read previous BLOG posts from early in the year. Dear readers, please leave in the comments your favorites from 2018. Mine is from October 4. Be well.

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42 Responses to “Notes From Underground: And To All a Good Year”

  1. Chris Says:

    A lot to ponder about, Yra. But, for now, congratulations on your grandson, and happy new year to you too!

  2. Guy Williams Says:

    Splendid, as always. Especially appreciated your suggestions to Mr. Trump.  I wish he’d take your advice, but then, I had hoped he’d have listened to Generals Mattis and Kelly too.  The man is turning out to be a disaster. Anyways Yra, to you and your wonderful family, a very happy and healthy 2019. Your friend, Guy

  3. Mark Garber Says:

    Happy New Year and Mazel Tov on your new grandson, Yra.

  4. Comodus II Says:

    Federal reserve is not federal, it’s a private bank. Anytime Fed has ran a Fed tightening in last 50 years, recession followed. It’s so predictable one can profit from it – and big banks have – just go out 12-18 months beyond 2:10 US treasury rate inversion. Anyone thinking that Fed is independent is not drinking from fountain of reality – it’s beholden to banking pressures and political pressures. All that the last 2 years have done is exposed that the central banking emperor is naked – just read comments anywhere. How come that doesn’t make it into the article?

    And anyone who doesn’t know how to make money in this environment also shouldn’t be investing their or anyone else’s money – short term us treasuries are returning more than US or global market in last 12 months, doh.

  5. Don H Says:

    If there are still “enormous” positions held by risk parity traders, that would assume more of the pain trade to come. As far as NFU is concerned, always insightful and thought provoking. Congratulations on the newest addition to your family (try not to lecture him about the yield curve) 😉
    Thanks for your efforts…Have a safe, enjoyable holiday!

  6. asherz Says:

    Those who follow this blog have heard the dog barking early on and often regarding the national budget deficits and the DOUBLING of the national debt in just a decade, a number that took 220 years to achieve previously. Fiscal irresponsibility has been accompanied by unrestrained monetary policies across the globe demonstrated by QEs, ZIRPS and NIRPS and Whatever it Takes behavior. The highs reached in financial markets mirrors the highs of most addicts which is invariably followed by mental crashes and depression. Our alchemists have brought us at the entry of 2019 to the point of Sartre’s No Exit.

    We cannot wish away the debt. We cannot repay the debt. We can only restructure the debt. The sophisticated readers of this blog know how to attempt to save their hard earned assets. And for that we owe you Yra a debt of gratitude for providing this forum.

    Mazal tov on the newest addition to the Harris family. That’s where the real wealth is found.

  7. Larry Says:

    Question for 2019: As Trump increases our isolation, reduces the value and credibility of America, and cedes out global leadership in many arenas, what currency/country steps into that void?

    Nice plug for your daughter! ( just kidding, she writes well and makes some great points–chip off the old block?)

    wishing you and yours a happy, healthy, and prosperous new year

  8. Trader1 Says:


    My Fave: All Of Them – You dont have to be doing this blog – Thank you the all the time you put into writing it for at a minimum they make me think.

    Question: If the long end of the bond curve begins to become ‘unglued’ due to $1T Deficit+Trump+Mnuchin — How do you think the FED will handle FED Funds Rate and Balance Sheet??

  9. kevinwaspi Says:

    מזל טוב, and thank you for another year of wisdom and reason.

    • yraharris Says:

      David—thanks for your great posts and the effort to find the most relevant blogs that will have value as we head into a tumultuous 2019.

    • yraharris Says:

      Professor–thanks for all the support and the wishes–have a great semester break and get ready for spring–there will be lots to teach

  10. Srdan Dosenovic Says:

    Happy holidays Yra, and thank you for all your contributions to sanity in the modern financial world!

  11. Publius Says:

    Previously stated your blog wasn’t meant to be political. However. Never in US history have we had such an ignoramus in WH. He’s destroyed norms and accelerated the 24/7 news cycle to ten-minute bites. Notions of Republicans, conservatives of addressing the debt and deficit are out the window.

    POTUS has summarily dismissed the adults in the room and is hovering over his remote looping FOX. The next few weeks could be perilous. Can Mnuchin & Kudlow keep our mkts, Republic intact?

    Congrats on new family member and thank you again for sharing your thoughts, and accepting ours on this blog.

  12. Keith Morton Says:

    Trump firing Powell is pure Trump trolling. He does this all the time. It becomes the talk of the intelligentsia. Then it goes a way. He said he could fire Muehler..same thing. He said he want to sit down with Muehler…sure. There is ZERO chance he even tries to fire Powell

    • yraharris Says:

      Keith—you better hope you are correct for if not the wealth destruction is going to be great and it may be more in the long end of the curve—but I fear you are wearing rose colored glasses .Next Trump will do a full frontal assault on the Dollar with the blessings of Robert Lighthizer and his playbook from John Connally and James Baker—Trump will try to push dollar lower in response to over active Fed—just a conjecture on my part

      • David Richards Says:

        In fact, while the dollar recovered somewhat this year, DXY is still down 8% from 104 to 96 since December 2016. The dollar recovery in 2018 was choppy, overlapping waves on the chart that merely retraced about half of its loss from 2017. Technically this is corrective behavior. NOT bullish. And NOT at all a STRONG dollar per MSM and Trump. That could materialize but we need to see DXY charge above 99-100 in a straight line up and stay up, then next print 104+. Only THAT qualifies as a STRONG dollar. Instead so far, which could change, the dollar’s next big move looks most likely to be down, resuming the trend down prior to its choppy recovery.

        This is not just a DXY story. Most EM currencies are also higher today against USD than two years ago and many look on the charts like they’ll turn the corner higher against the greenback. Despite some broad market turmoil, note a number of EM currencies have actually risen against USD even since last month.

        So many false narratives out there that are mindlessly repeated like parrots talking. Do those who publicly cover markets & finance, Yra and Alexandra and a few more excepted, ever even look at a chart and think independently or critically? Some independent outside-the-box thinking, even when it turns out incorrect, is more useful than parroting the party line. Because sometimes the thinkers get it right and win bigly.

        2019: Overall a weaker dollar and (nominally) higher equities? Opposite of the current consensus on the street.

  13. Chuck Reeder Says:

    First of all- Yra congratulations on the newest addition to the Harris family. Mazel Tov. Secondly, for the people that refer to the good policies of Trump- so as to pretend that he is anything other than a loathsome human- a person that cares ONLY about himself- to the detriment of our country- you have at the most, two more years to continue the charade. By “good policies”, are you referring to the tax cut and regulations scale back? Nothing wrong with the regulations scaleback, as long as they don’t overdo it and it comes back to bite us. But the tax cut? In the midst of an economy gaining traction? This was a pure political stunt- resulting in a “sugar high” that is toward the end of its run. The market has seen its highs as far as this bull run. The economy has seen its highs as far as this cycle. And then all you have left is the farce at the border- pushback on China- which is problematic- and a person who emboldens bigots- attempts to trash our rule of law- trashes our allies and defends our enemies for his own personal benefit. The last adult has left the room. All that will be left will be sycophants to offer zero pushback on this maniac. Fortunately the proverbial shit is about to hit the fan. When Mueller finally comes out with his report, campaign violation charges will be the least of his problems. Small potatoes. It is time however, for Republicans who use to tell us how terrible deficits were- how they hated Hillary because she was a liar- etc. etc. to take a look in the mirror and see themselves for what they are- unprincipled hypocrites. I apologize for the rant. I have never used Yra’s post for political rants. But these are not normal times- nothing about this guy is even close to normal. And I don’t mean he is abnormally wonderful. Happy healthy to everyone- and you are all invited to my TPP party.

  14. Pierre Chapuis Says:

    I once heard: that if you’re the smartest one in the room, you’re in the wrong room. Thank you for providing the right room for me Yra.
    If we pull out of Syria and Afghanistan, wouldn’t that free up some money? Could it be that Trump is looking at different ways to balance some of the budget. Just a thought
    May everyone enjoy these holidays! I always look forward to reading Notes From Underground and Comments. Peace

  15. Comodus II Says:

    If Trump is ignoramus for wanting to pull US troops out of Syria and Afghanistan, what does it make the three presidents before him – three globalist stooges? Majority of Americans are not going to be fighting globalists wars, neither will the Europeans. The game is up, wake up and smell the roses. Trump is not the cause, he’s just one of the symptoms – and based on voting results inEurope and elsewhere like Brazil and Mexico, many more like him are coming.

    In regard to the debt, it won’t be repaid – and the problem goes back to 1913 and creation of the Fed. Since at least 10% realize that in US, I wonder what happens when masses learn this in the next few years?

    And the game of endless taxation of the tax donkeys is also up, starting with France. Every percent up from here on out is less growth and more migration of productive citizenry out of libtard and overburdened areas.

  16. David Richards Says:

    Hmm, so many favorites. In addition to today’s, off the top of my hear there’s also at least these two as well:
    Someone in that last one also warned about a crash in US high yield corp credit. It didn’t crash but it sure did teeter and tumble.

    • yraharris Says:

      David–thanks for your thoughtful comments and posting that two earlier blogs.Let’s get the party started

  17. The bigman Says:

    Wishing all a prosperous year to come. Last year I challenged all to predict the 10 year yield at the end of this year. Only Yra was brave enough to accept the challenge Not one to toot my own horn(unlike Mssrs Obama and Trump) but if no one else is going to play…. last year I predicted that the 10 year would end the year at 2.78(see post 12/31). So I have missed by one basis point. Being from a quasi scientific background ( medicine) theory and empirics( or fundamentals and technicals) are only as good as their ability to predict future events. Now In my case This may well be the blind hog finding the acorn. But as our host often reminds us “This isn’t rocket science” or as a mentor of mine once said ” There is less to this than meets the eye”. So I am making the same offer as last year. Closest to the final 10 year for 2019 wins bottle of their favorite libation within reason(under $100)(yes Yra I know the MRSP of Pappy van Winkle is 59.95 on the website but it is only sold on the black market for a multiple of that). Thanks to all for a most informed 2018!

    • Rob Syp Says:

      WAY TO GO BIGMAN that’s quite an achievement are you in southeast Florida? If so, drinks on me!

      • The bigman Says:

        Thanks for the kudos and kind offer but I am a denizen of the People’s Republic of California best wishes for a prosperous New Year.

  18. Judd Says:

    Favorite Blog was the first week of October when you not only picked the high but predicted a 20% retrace. I thought that was aggressive at first. Not anymore.

  19. Mike Temple Says:

    Speaking of false narratives…..Powell and the FOMC are like Canute challenging the tides.

    While they pontificate about what they “believe” 2019 will bring and why 2-3 hikes are still in order, the action in the treasury market, and specifically, the ReD ED “pits” is SCrEAMING that Powell is the stooge at the poker table.

    Today alone, EDH/M 2020 soared 12 tics! Spread between EDH19/EDH20 gapped our by nearly 4ish bp today to 7.5 bp of anticipated EASING over that timeframe, versus the silly notions of Powell that he can hike 2 or 3 times next year.

    ED pit sees BIllions being wagered daily. I will listen to the message of that market every day, 24/7, over the “words” of any Fed Head not named Volcker.

    And then 2yr yields flash crashed today which sent 1yr/2 yr into INVERSION as an early Xmas present.

    Bah humbug

  20. Bosko Kacarevic Says:

    Yra, after many years of reading your blog, I thought now is a good time to chime in. All your blog posts have been mindful and educational, but the one that I think has significant relavence to today is actually from 2016… You say the “FED is in motion” and coincidentally as we have discussed many times, it seems the economic landscape of today will cause GOLD-IN-MOTION to counteract the debt crisis. As I’m sure many of your readers are aware, when the credibility and integrity of the world’s reserve currency comes into question; the natural response is a currency that needs no country, GOLD. Thank you for your guidance over the years and congratulations on the grandson, Mazel Tov.

  21. Chicken Says:

    What are the chances the S&P tests 1300 in 2019?

  22. asherz Says:

    Your government at work.

    Evening news will feature DOW 1000 points.

  23. the bigman Says:

    My entry for the final 10 year yield for 2019. First consideration is the Fed. My gut says that they will not raise again The tea leaves, oops the dots, say 2. So lets go with one which moves the Fed rate to 2.75. The unwinding of the balance sheet will continue at current pace So now the question is what is the 10 year spread currently ~16 basis points. In my mind the spread is the measure of risk. We are currently risk on. The other risks are the trade war, Brexit and the slow death of the EU, fiscal policy and divided government, and to a much lesser extent the Mueller probe.
    First trade. The main player here is Chairman for Life Xi. He does not have to run for election so he can choose his time and place. His choices are deal with Trump who has drawn a line in the sand for March 1. If the Mueller probe goes against Trump then he may have to deal with Mike Pence who unlike Trump is an ideologue who has severely criticized Xi’s horrible human rights record. Nod here goes to Trump. His other option is to hold pat and wait to deal with a potential Democratic globalist administration in 2020 which he can dominate but is not guaranteed.
    In the run up to the trade talks there has been Chinese saber rattling threatening to retake Taiwan and sink US carriers. I believe that this may portend some deal being made while Xi waits to see who folds. A deal would be risk off.
    Next Brexit and EU. Once other nations see the UK survives Brexit (Rick Santelli pointed out no deal here may be the best deal for Britain) others will be embolden. The two biggest cheerleaders Macron and Merkel are dead men walking. This three card monte game run by France and Germany will end but slowly and painfully The EU will no longer buy new debt but will rebuy expiring debt. Risk off here
    Third is fiscal policy and divided government. Big risk is the new US Mexico Canadian pact Will Nancy Pelosi scuttle this accomplishment? Close call but I doubt it. What is the only thing Nancy and Donald can agree on? Infrastructure. Donald is a developer. I have known several developers and they all have 3 common traits: they like to build things; they believe that they and their projects are the best thing since beer in cans, and they love to spend other people’s money. So look for an increasing US debt. In the short term infrastructure as always will be risk off but in the long run a debt disaster. For 2019 USMCA and infrastructure will be risk on.
    Finally Mueller probe. I believe that we are will see a Ken Starr Bill Clinton rerun. No collusion but other misdemeanors that the Dems cannot resist and impeachment will happen. John Roberts needs to dust off the robe with the chevrons for the show trial. Hard to rate this as I doubt the Senate will convict and anyways even Pence would be a welcome relief. So no direction here’
    In summary Overall we will see risk off. I know this is going against the grain but we have gone thru the Looking Glass How much does that increase the spread. I think it will widen to 40-50 points so lets go to 45. My predicted 10 year rate for 12/31/19 is 3.2%

    • David Richards Says:

      Why that rise in TNX for risk off? Is that the Armstrong scenario in which both the US economy and US sovereign debt both collapse together? That’s probably inevitable but still much too early, and not until after other sovereigns fail first. Instead for now, the Fed and other central banks will support their respective sovereign debt via market intervention/purchases of their state’s bonds. A la Japan for years. Not only to prop up the state but also to support asset prices.

  24. the bigman Says:

    correction Brexit and EU are risk on. USMCA and infrastructure will be risk off. Rise in TNX will be due to move to equities as a result of trade deals and infrastructure spending muted by the slow death of the EU. No Fed intervention in 2019

  25. Chicken Says:

    Apple speaks on China?

  26. Chicken Says:

    Considering the phenomenal employment reports I keep hearing all about, retail sales, commodities, etc., should be enjoying record demand but no, not happening?

  27. the bigman Says:

    Chicken Que Paso? the sky didn’t fall today!! As far as Apple it is simple their phone costs too damn much. I suspect no one on this board paid a 1000 bucks for a phone or if they did they wouldn”t admit it

  28. yraharris Says:

    bigman–wonderful post.Get the thinking going .What is being revealed ,especially as we saw the massive move in the YEN last night is that the central banks are not masters of their own domain.The fragile edifice erected through the over hyped QE and its massive inflating of global asset prices is being challenged by markets as the QE additions have gone into reverse on a net basis–gold/currency plays are a reflection of the realized impotency of the printing press.As deficits grow even in the time of ultra low interest rates all sovereign debt is subject to a majo reassessment

    • David Richards Says:

      The QE reversal is apparently about to reverse. Powell today said the Fed has listened “carefully and sensitively to the market’s risk concerns” and the Fed “may shift the process of balance sheet normalization”, as there is “no preset path for policy”. Look no further than the BOJ experience, in whose footsteps the Fed is following. The BOJ years ago reversed its QE to about the same small extent and time the Fed has, then stopped and later opened the spigots harder than ever. It’s probably the Fed’s future, too.

  29. the bigman Says:

    Thanks Yra as always inspired by you and the other bloggers. Congrats on the new grandchild- the greatest holiday gift a person can receive. IMHO Dave agree with you entirely as I have opined before We are all turning Japanese I really think so applying Kant’s universal maxim. That said I am impressed that the Fed has been able to raise rates and unwind even to this degree. I suspect the corporate tax cut lifeline allowed some to survive that would have otherwise drowned by now.

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