Notes From Underground: Hello, 2019

“I am a sick man. I am a wicked man.”

So opens the Dostoyevsky novella Notes from Underground. Sometimes I seem to be caught in a similar existential trap as I analyze the global macro data and fundamentals. I am sick because I continue to pursue the opportunities that explode before me. I have taken a turn for the worse and become sick because of the constant flow of manipulated headlines crafted to purposely activate the trading algorithms. Tweets and headlines with no context have become the coin of the realm, especially for high frequency trading operations. But their role in the market jungle does little to dissuade me  from honing my craft. The bottom line: Greater preparation and more patience is needed.

This view was succinctly summed up in an October 2017 Barron’s article by John Curran, a former partner at the great firm of Caxton Associates. The article, “The Coming Renaissance of Macro Investing,” was written in response to the frustrations of trading in the world of headlines rather than the deep perspective of political economic fundamental analysis. Curran concludes the piece with this nugget of wisdom:

“As my mentor Bruce Kovner used to say, ‘Nobody rings a bell at key turning points.’ The ability to properly anticipate change is predicated upon detached analysis of fundamental information, applying that information to imagine a plausible world different from today’s, understanding how new data points fit [or don’t fit] into that world and adjusting accordingly. Ideally, this process leads to an “aha” moment, and the idea crystallizes into a clear vision.”

This is what NOTES FROM UNDERGROUND strives to do. It is where we thrive to discover the unbalanced world of 2+2=5. You do the math.

***Let me proceed with my screed against the bumbling Treasury Secretary Steve Mnuchin. After I wrote my last post, Mnuchin proved his ineptitude by panicking in the face of stock market weakness and leaking to the press that he had called the CEOs of six major financial institutions inquiring about their financial and liquidity situations. All provided a rosy outlook providing Mnuchin to announce that there was no fear of a financial crisis. Stock markets were in the thralls of “fake concerns.” The problem that Mnuchin failed to understand was two-fold: One, it was not a financial crisis concerning the Dow but a crisis of confidence in the executive branch. And two, by raising the issue of a financial crisis Mnuchin himself was exacerbating the situation.

The Treasury secretary was attempting to take a page from the Greenspan playbook of LONG-TERM CAPITAL MANAGEMENT when the markets were needed to be secure in believing that the Fed and Treasury were managing a potential liquidity crisis. In this case, it was the wrong strategy, which immediately caused the markets to fall. Mnuchin felt he had to do something and that resulted in the most negative of outcomes.

One last thing about the Treasury secretary. There was a Bloomberg story on December 18 titled, “Mnuchin Blames Volcker Rule, High Speed Trading For Volatility.” The Secretary incorrectly promoted the idea that a rollback of the Volcker rule along with greater SEC control over HFT would lessen the recent volatility. Mnuchin said, “In my opinion, market structure has led to a lot more volatility. Part of this is a combination of the market presence of high-frequency traders combined with the Volcker Rule.”

The Bloomberg article points out that these two elements have been in place for at least five years and it there has actually been less volatility. The danger here is that Mnuchin threatens to use his position as the head of the Financial Stability Oversight Committee (FSOC) to investigate and possibly ameliorate. This is Mnuchin merely trying the to do the bidding of money center banks to try to recreate the prop trading shops that existed prior to the Global Financial Crisis. It is not the Volcker Rule causing the volatility but the executive branch’s use of tweets to sound off on so many various exogenous events that plays havoc with the financial markets. Mr. Mnuchin, we have met the miscreant. It is you. The lack of a qualified Treasury secretary in times of rising global and domestic uncertainty needs to be corrected. Being a former partner at Goldman Sachs is not a prerequisite for competency. Now about that trillion-plus deficit ….
***The turbulence in the Japanese YEN last week was no fat finger error because the currency remained elevated for 24 hours. After the poor Apple forecasts the Asian markets were in turmoil as long-held positions in the YEN carry trade were unwound in a post-holiday flight to safety. Japanese investors were spooked by weakened U.S. data, coupled with increased negative news from China. The strong YEN is causing problems for the BOJ, which has based its entire QQE policy on elevating inflation to 2 percent.
A strong YEN will act as a deflationary drag of prices and force the BOJ to deploy a more aggressive asset purchase program. On Thursday night there were reports of the MOF and BOJ meeting about ways to counteract the recent YEN strength, which resulted in a selloff in the YEN on all the crosses (EURO, SWISS, Aussie, pound, dollar). There is little left to buy of JGBs. The BOJ owns so many that the 10-year Japanese debt market has almost no liquidity. Thus, if the BOJ increases liquidity it will have to buy more Japanese equities or begin the open market purchases of FOREIGN BONDS. Unfortunately for the BOJ and ABE GOVERNMENT, the purchase of foreign paper would result in a weaker yen and raise the ire of the G-20 that Japan is manipulating its currency.
This dilemma for Japan will have me paying very close attention to the gold/yen cross to evaluate the efforts of the BOJ to continue to monetize its policy of 2 percent inflation. Sigh, another Central Bank close to losing control of its policy ambitions.
***On Friday, Fed Chairman Jerome Powell walked back his comments from the FED press conference on December 19, when he maintained that the FED‘s balance sheet reduction was on auto-pilot. In a panel discussion with former chairs Bernanke and Yellen, the current FED chair changed directions by asserting that “the Fed WOULD CHANGE BALANCE SHEET RUNOFF POLICY IF NEEDED.” Powell’s comments were in-line with comments by two FED regional Presidents,Robert Kaplan and Loretta Mester. The volte-face helped propel a strong market reaction that had already become based on overnight news that the PBOC was cutting its reserve requirements in an effort to stimulate loans in China and a strong JOBS number in the U.S.
It was the AUTO-PILOT comment at the Powell press conference that caused the SPOOs and NASDAQ to sell-off on December 19 and close out the year very weak. The BONDS on Friday were sold as the search for havens was reversed as it appears that the FOMC is not tone-deaf to the demands of Wall Street for liquidity to finance the colossal pile of debt on private and public balance sheets. The FED may have found it is closer to normal/neutral than previously thought as it tries to comprehend the impact from the double-barreled approach to shrinking bank reserves in an effort to keep the economy from overheating.
In addition to the strong gain in payrolls was an increase in average hourly earnings (0.4 percent), bringing the average to 3.2 percent for the year. Will the good news on jobs and Powell result in lessened criticism from the White House about the FED? We can only hope. If the FED really slows the liquidity drain the proof ought to be found in a weaker dollar, steepening yield curve, higher commodities and stronger precious metals. The GOLD has performed very well against all major currencies as the light continues to shine on possible flaws in the exit strategies from QE policies of the last decade.
In the U.S., will the FED allow jobs data to run hotter for longer in an effort to allow some long-awaited rewards for the stagnant wages of the American worker? The House Financial Services Committee under the Chair of Maxine Waters will certainly want the FED to slow its effort to contain wage growth, a stance in line with President Trump’s desires.
This promises to be an interesting year for a sick, wicked man finding satisfaction in a world that celebrates that 2+2=5.

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19 Responses to “Notes From Underground: Hello, 2019”

  1. Asherz Says:

    With 85% of the trading generated by black boxes which are programmed to react immediately to key words or phrases, I don’t know how anyone can trade securities or commodities and sleep nights. For us very long term investors, we look at all the fundamentals, take unlevaragrd positions, and let the short term and “volatility” be damned.
    What do we see? Debt/GDP ratio unsustainable. Budget deficits in 13 digits. 22 trillion in national debt and rising with 3.9% unemployment. 5 trillion in corporate debt and other securities rated BBB or lower, many maturing in 2019/20. Major prop for equities having come from stock buybacks, using all earnings and heavy borrowing to buy overvalued, overpriced stocks and putting Executive stock options well into the money.
    We now have a Powell put in place after Friday (didn’t take that long to lose his tough guy facade) with White House badgering and “volatility” . Add to the stew China weakness and belligerency, EU fragility, the Apple canary singing, a strong employment number and consumer spending not least of which due to a 1 1/2 trillion dollar tax cut paid for by more debt, and some other factors I’m forgetting, and the long term investor can go away on vacation and await the outcomes. And if the analyses are wrong, he has bubbles that will need to be enlarged from their present overblown condition.
    Sick indeed. I don’t know about evil unless you call the perpetrators of this mess evil instead of just not very smart. Now Davos should have some interesting conversations soon and there you will certainly find some evil doers.
    Bring back Paul Volcker and Glass-Steagall.

    • yraharris Says:

      Asherz—we are in total agreement on Volcker and Glass-Steagall.Having just finished Volcker’s new autobiography I miss him every day–that was leadership in spades

  2. silverbug2155 Says:

    Depending on the MSN to tell me what’s going on truthfully is bogus in itself. I’ll take the President’s Tweets anyday to level the playing field of these treasonous evil individuals. Who long ago racked up trillions in debt long before Trump. There is no solution when staring at it all. Trump is the first to stand up to them all.

    • yraharris Says:

      Silverbug-not criticizing Trump except for the White House tweets impacting the volatility on financial markets.And as for the debt issue—yet again–running a massive deficit with 3.9% unemployment is vastly different then 1.5 % growth and 6% unemployment—remember that it is Kudlow preaching the wonder of supply side economics –Trump without question has done some positive things but the failure to pay for the corporate tax cut is a gigantic mistake and that is a cloud over hanging 2019—and Mnuchin is weak and a very poor choice as U.S. Tresury Secretary as bad as Geithner,Lew,Paul O’Neil and certainly Michael Blumenthal–if you fail to see that you are looking through blinders and probably the work of Alan Blinder

  3. Richard H Papp Says:

    From a secular bottom of below 6 the Dow Industrials:Gold Ratio had a move to a little above 22 in favor of equities. Recent market action gave the ratio a 5 point correction in favor of gold. Said ratio seems to have bottomed and looks “to want to” move up.

    As to the CBOT Long Bond the downtrend line from the summer of 2016 was penetrated this week in favor of lower rates. Then Friday we had a retracement to the breakout point. I am reminded of Marty Zweig’s (R.I.P.) frequent quote of “don’t fight the Fed”. The Bear lasted 2 1/2 years so………

    • yraharris Says:

      Richard—I would be more inclined to use Zweig’s quote in reference to stocks—in regards to other asset classes I would be hesitant because of the macro dynamics.It is a nice simplistic view and certainly has relevance to equity markets but others it depends more on many other variables unless Paul Volcker at the helm

  4. Don H Says:

    Though “sick”, you’ve started 2019 off well! Kovner’s quote is still & will always be valid. A case in point is an Oct.’18 podcast on QTR with Bill Fleckenstein. Bill shared his macro view regarding AAPL being a decent short candidate based on fundamental analysis. We see how that turned out. Yes, some HFT algos will gyrate on a headline, tweet or simple scalping strategy but those programs do not control a dominant trend or reversal of such…that requires code backed by true fire power$$$
    Happy New Year all!

  5. Tader 1 Says:


    Fully understand your point if Japan buys Foreign Bonds to increase liquidity weakening Yen in the process it will draw “ire” from G20.

    With USA needing to fund $1Trillion deficit would the Trump Admin. “overlook” Japanese buying of USA debt to help get our deficit funded & blowing out bond yields?

    • yraharris Says:

      Trader–regular purchases by Japanese banks,pension and insurance companies is one thing,organized purchases by the BOJ in coordination with the Ministry of Finance would be an altogether different story and be viewed as a contravention of G20 protocols especially as every nation is concerned about the value of its currency as reflected in so many central bank statements–RBNZ,RBA,BOC,SNB ECB,BOE—everybody but the Fed because it is the responsibility of the Secretary of Treasury—making someone will call Lighthizer because Mnuchin is busy worrying about the stock market

  6. sal Says:

    Yra, we are all existentialists living in a transcendental world.

    • yraharris Says:

      Sal–certainly no Stranger to that view especially as we deal with the financial crisis that continues to PLAGUE the global system.Can there be NO EXIT from the morass of central bank balance sheets?It is certainly on of PHENOMENOLOGY.Time to get a coffee at the EXISTENTIAL CAFE

      • sarjoy12 Says:

        Like Sisyphus I keep pushing my gold up the hill only to have it roll back down. It is an absurd struggle but I accept that and am happy.

    • yraharris Says:

      Sarjoy –Gundlach seems to have bigger rocks

  7. Rob Syp Says:

    How does a 35% haircut in AAPL and many other stocks effect the SNB and their financial alchemy play?

  8. the bigman Says:

    Rob SNB is a publically traded stock It peaked on 4/4/18 at 9246 US$ and yesterday was 4079 US$ so the answer is not well recently but still has increased from~ 1700 US$ to current level over the past 2 years still better than UST returns. Swiss know how to use a printing press

    • yraharris Says:

      Bigman–you are on top of it–thanks for keeping us informed .Yesterday comments from Zuebrugge of SNB reminded me of 2015 in January when the ass Thomas Jordan swore they were going to maintain the PEG at 1.20 and a week later the whole thing was blown up.There is no PEG to defend but when the swiss find their tongue i always listen

  9. Arthur Says:

    Economists at J.P. Morgan have developed a model based only on the historical predictive power of the stockmarket, credit spreads and the yield curve; that implies the probability of a recession in America in 2019 is as high as 91%.

  10. Chicken Says:

    It’s reassuring to learn the banker farm bill has served it’s purpose.

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