Notes From Underground: Things Are On the Boil

There are so many things causing angst in the global markets. There was news out of France on Thursday that the government was recalling its envoy to Rome because Italian politicians met with the yellow vest movement. To President Macron I offer this history lesson: In 2011-12 French President Nicolas Sarkozy–with the cooperation of German Chancellor Angela Merkel–crushed the Italian bond market in an effort to remove Prime Minister Berlusconi. The Eurocrats in Brussels parachuted in a preferred bureaucrat, Mario Monti, in an effort to get Italian politicians to halt the fiscal bleeding. The French have a great deal of audacity in complaining about Italian meddling, especially as Salvini/Maio have a legitimate reason: the upcoming European Parliamentary elections.

As a result, the European bond markets were unsettled by weak economic data coupled with this new political crisis. The German BUNDS were the recipient of safe haven status as BUND YIELDS dropped to 12 basis points.

As NOTES FROM UNDERGROUND has warned for several years, if you want to be short European debt sell everything but the BUND because the German government debt is deemed a high quality liquid asset that is needed for regulatory purposes. I have written several pieces warning certain BOND kings that the BUND was not the instrument of choice for a short. The FRENCH OATS, which are yielding a mere 40 basis points more, were a far better short. However, when I first started discussing the trade the gap was only about 20 basis points. Europe has a cacophony of problems but yet the EURO holds up versus the DOLLAR. The GOLD/EURO cross has been a steady play as investors seem to be reaching for the ultimate life-preserver of value.

An issue gaining in importance is the ROLE of Modern Monetary Theory (MMT) in global finance. There are many academics and policymakers maintaining that large deficits don’t matter for a country as long as they can be funded in their own currency. This was essentially then-Fed Governor Jerome Powell’s response when I asked him about who guarantees the ECB’s balance sheet. (The now-chairman said, “They have a printing press.”) The basis of MM is just that: Sovereigns have a printing press, so they do not fret about taxes as they will be funded by printing. This is now a major theme for NOTES FROM UNDERGROUND as we search for successful trades and investment in the time of sovereign irresponsibility. But it begs the question: Who in their right mind would purchase the LONG-TERM SOVEREIGN DEBT of a sovereign committed to wealth creation through the printing press?

I have read copious notes over the past two weeks trying to get a deeper understanding but the more I read the more convinced I become about the insanity of this policy. Why would any investor, be it pension funds, sovereign wealth funds, insurance companies or individual investors decide to invest in an asset not pledged to maintaining its credibility as a store of value. Nowhere in my reading do I find any concern over the role of the DOLLAR as the world’s reserve currency. Is it any wonder why the Russians, Chinese and others are buying GOLD with their dollar reserves? This issue will be with us for a while so be prepared for many trades to follow.

In Thursday’s Financial Times (online), Gillian Tett has a piece asking who will buy U.S. bonds. And she doesn’t even entertain the MMT discussion.

***On Thursday I was in Chicago taping a show with Anthony Crudele that will air online Sunday afternoon prior before the market open. This is the initial production of Futures Television. Much, much more to follow on MMT, negative interest rates and the overall global debt situation.

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13 Responses to “Notes From Underground: Things Are On the Boil”

  1. David Richards Says:

    Yra, I was going to post about MMT, having read much about it too, but you were on break. Bottom line is there’s nothing “modern” about MMT. It’ll simply be old-fashioned money printing.

  2. margaret ranger Says:

    Your thinking dovetails with Paul Volcker’s latest book, “Keeping At it.” So valuable!

  3. Rick Says:

    Such timely insight Yra. Need I say more….
    Ocasio-Cortez was interviewed on Morning Edition today and when asked how to pay for a Green New Deal, talked about decoupling the concepts of tax revenue and government spending, which is the cornerstone of Modern Monetary Theory. Amazing to hear that on NPR. Not sure Steve Inskeep quite got it; it could take a little while to sink in.

  4. fredhavell Says:

    Unable to locate Crudele’s program. Can you provide more information?

    • yraharris Says:

      Fred–still being edited.I will be posted when finished by the uber talented Tony Vitale so it will be of the highest quality.Like a good trade,be patient and let it develope.Thanks.

  5. Trader1 Says:


    It would appear at least one “Bond King” reads 2+2=5 and repackages your work into their own?? Like how could this so called ‘bond king’ EGO ever allow it to give credit to a blog????

  6. Trader1 Says:


    Euro/Dollar Cross – What do you think the market is trying to price in that is coming at us in the USA that keeps the Euro this strong against the Dollar??

    • yraharris Says:

      Trader—the dollar is not rallying as many ,myself included thought it would be based on lessening liquidity coupled with rising yields relative to the other major currencies—the solution is X which this blog is trying to solve

  7. Econosums Says:

    Varoufakis at Oxford Union in Dec on the Euro. Thought it explained some things.

    • TraderB Says:

      Yra- Yanis is implying that Euros held in German Banks will ultimately be converted to Deutsche Marks that will be much more valuable than USD. Therefore all of the wealthy Europeans are moving their Euros to German Banks rather than selling out of their currency. Do you agree with this logic?

  8. Mike Temple Says:

    Regarding MMT, how is it possible that serious academics have forgotten (if they even knew him in the first place) Hjalmar Schacht, the head of the Reichsbank in Weimar Germany after WWI reparations destroyed the German economy and politicians and industrialists begged/demanded that Schacht roll the printing presses. He did, and the great hyperinflation set in, contributing to the social chaos that ultimately gave rise to Democratic Socialist (ring a bell?) and Hitler.

    Here is a brief reminder/overview.

    I am not suggesting anything as dark as that for the US. But, as you Ms Tett ask, who is going to buy US treasuries, especially among foreigners. I fully expect Mr Powell to get “rolled” and QE Infinity to be the hallmark of monetary policy in the not distant future.

    There is your BUYER. Of course, the release valve will likely be the USD. Look out below……Got gold?

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