Notes From Underground: It’s a Drag Listening to Draghi Get Old

ECB President Mario Draghi’s press conference was, once again, another act of flim-flam as he PIVOTED away from any tightening for the next [FILL IN THE YEAR]. There was NO SURPRISE as the TLTRO was well telegraphed various news outlets in recent weeks. What’s amazing is that the currency markets were surprised by Draghi’s press conference as the U.S. DOLLAR staged a sizable rally, reaching its highest level in more than three months. The YEN was stronger as the weak stock markets provided a sense of Japanese repatriation of invested capital, while GOLD performed dismally.

The GOLD needs to rally Friday or it will be time to exit the gold/currency crosses that have been a solid trade for the last three months. Yes, the strong dollar acted to keep GOLD down as the algos are configured for that correlation but the ECB pivot put a major bid to global bonds and, even more importantly, short-dated rates. THERE IS A BLIND CHASE FOR YIELD BUT FOR OUR CONCERNS THIS IS THE QUESTION: How much risk are you willing to absorb for an extra 15 basis points?

The U.S. 2/10 curve is 15 points for an extra eight years of duration risk .In an environment polluted by Draghi and company’s negative interest rate policy, coupled with deep discussions about modern monetary theory (and no constraints on debt), purchasing long-term sovereign debt is a fool’s mission. I don’t care what course others may take but for me I will stay in short duration.

***While the GOLD failed to rally with the ECB’s capitulation, the EQUITY markets also failed to sustain their recent strength. Even though the EURO declined, the DAX and Stoxx 50 failed to hold their early rallies. The entire board with the GOLD actually had a whiff of deflation as almost the  commodity complex struggled to react positively to declining interest rates. The rationale for the ECB’s action was the headwinds coming from a slowing global economy and political uncertainty stemming from Brexit, Italy and coming European elections.

This week, the Reserve Bank of Australia and the Bank of Canada had policy announcements. These central banks both used the global slowdown as reasons to keep monetary policy accommodative for the foreseeable future. Even the recent FOMC hawk Lael Brainard was speaking Thursday about the slowdown in China, Germany, Japan and the entire euro area as a reason to be prudent and patient for a policy of “watchful waiting.” The ECB pivot has trapped the FED into doing nothing regardless of the DATA. President Trump will probably be tweeting his concerns about the relative strength of the DOLLAR because of the “too tight” FOMC.

On Friday we get the February PAYROLLS. Market consensus is for an addition of 185,000 jobs, a 4.0 percent jobless rate and a 0.3 percent gain in average hourly earnings. But in an unusual position for my analysis, this data is like Scarlett O’Hara: Frankly I don’t give a damn. The action by the world’s central banks has relegated data to be insignificant compared to the action to keep accommodative policy in place, which is putting upward pressure on the DOLLAR.

Can Jerome Powell deflect White House criticism coupled with EQUITY MARKET ANGST to tighten policy, especially if the dollar strength puts downward price pressure on imports? If my analysis is correct, the yield curves OUGHT to steepen following the EMPLOYMENT REPORT.

The gold should also find a bid to salvage a dismal week. I will be patient following the jobs report to allow the markets to tell me if the analysis has merit. Preserve capital while waiting for the picture to unfold. Mario Draghi has battered the world with a policy of “whatever it takes” to save the euro and the EU. Lower for longer is its battle cry and the fallout is causing major systemic problems. How long will President Trump tolerate a weakening euro before threatening the EU with tariffs? Exit Mario Draghi, pursued by a BEAR.

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11 Responses to “Notes From Underground: It’s a Drag Listening to Draghi Get Old”

  1. asherz Says:

    Draghi’s DRANG (as in Sturm and Drang, a sidearm weapon) should not have caused any surprise. Today the Shanghai index was down 4%, as I don’t believe that China will even see a low 6-6.5% GDP growth this year even when tariffs are eliminated. And don’t be surprised when later this year we see Powell begin to lower the FF instead of 3-4 increases bandied about 5 months ago. With QEs to follow as the two note dance step resumes with little else in the almost empty quiver on his back. Chuck Prince kept dancing but look what happened to him.
    The Great Recession was defeated by super carriers and the strongest financial WMDs. But the Super Heroes didn’t know when to leave the stage. and now, a decade later, the virus has morphed so that the anti-biotics will no longer be as effective.
    Bad policy leads to bad results. Preventing a cleansing fever (going back to Greenspan in 1998) ultimately leads to a metastasized stage four incurable disease.
    Markets left alone correct and come out healthy. Bring in cock-eyed economic theorists from Princeton, and you get a Frankenstein getting up off the gurney. What do you call turning gold into lead?
    (Sorry for my Austrian accent).

  2. asherz Says:

    P.S. As to gold on Thursday, it held despite an upward leap in the dollar. Today is catchup.
    Cute carton on what China sends us and what we return.

    • yraharris Says:

      Asherz—-a song of appreciation to you for the cartoonand certainly right on target –the Chinese data was questioned by wait for it–Brookings–and they figured out that GDP was misstated by more then the crap on the balance sheets of Jack Welch GE—imagine that Chinese data collection is flawed.The world is a compilation of turning gold into lead —reverse alchemy indeed.That is why I love the work of the Braudel school and especially of Braudel,Wallerstein ,Arrighi—and the pleasure I have had of being taught for the last 20 years by Bernard Connolly

  3. Trader1 Says:


    MMT Debt Issuance – If long term debt struggles to find a bid right in here during good GDP Growth might this MMT Theory just die in the incubator?

    And that would be prior to the bond market getting a whiff of MMT Debt Issuance – the bond market would move way ahead of that issuance before it hits the market…..Unless there is a “Modern” way to find bond bids

    (I would suggest something is suspect out of the gate when the title includes “Modern” – as if U think otherwise its just old fashioned out-of-date thinking, not a relevant position)

  4. Richard Papp Says:

    Yes, gold had every excuse to break 1,280 yesterday but did NOT!
    At 6:20 AM EST gold at 1293 and silver at 15.10

    • yraharris Says:

      Richard–presently back higher on the week which is important.The data proved irrelevant as it is a mixed bag but the central bank capitulation is certainly not—are we nervous that Mario is now driving the bus?

  5. Bosko Says:

    Yra–We’ve discussed the “gold-in-motion” idea many times, and since Italy has recently expressed interest in joining the Belt and Road Initiative, and China is bullish on gold, wouldn’t it be interesting to see if Italy decides to put their large gold reserves in motion for the Belt and Road? The EU is not in favor of this move, I wonder why?
    Prime Minister Giuseppe Conte is scheduled to attend a Belt and Road conference in Beijing this April–maybe they should discuss minting some special Italian gold coins exclusively for the Belt and Road project?
    Seems like the global economy is reaching the end of a monetary cycle and the pundits are scrambling to create distractions from reality like MMT. Meanwhile the golden answer is staring them in the face.
    As you know, I’m doing what I can to bring the gold-in-motion idea to the small private investor with the Ledgermatix platform at and hopefully it will become a trend that will work its way up the ladder? I’m not sure if gold is the only answer, but I think history shows us that it is a very successful medium of exchange.


    Thanks again for your valuable discourse over the years,
    Bosko Kacarevic

  6. Richard Papp Says:

    Yes, I have last Friday’s close as 1293. In addition, the open interest bottomed at the beginning of the week at 468,335 contracts and as of the close yesterday the open interest was 499,967. As we know it takes volume to move prices up with increasing participation.
    Thirdly, the $DOW:GOLD ratio seems to be meeting resistance at the 200 day.

  7. Arthur Says:

    Wow!! 😱 China’s economy might be nearly a seventh smaller than reported Via The Economist

  8. Notes From Underground: The Jobs Report Was Not Data Dependent | Notes From Underground Says:

    […] Where 2+2=5 is also a beautiful thing « Notes From Underground: It’s a Drag Listening to Draghi Get Old […]

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