Notes From Underground: When a Slower Fool, Always Look on the Bright Side of Life

First things first: There were no surprises out of the G-20, at least for those who read Notes From Underground and listened to the discussion that took place in the Whitewave Trading room. The most significant outcome was that President Trump held off from installing additional tariffs while President Xi confirmed that China would be buying more U.S. production, especially in the agricultural sector. In Thursday’s podcast with the Whitewave participants I advised that with the current weather problems in the U.S. heartland the Chinese would have to be vigilant about the cost of global grain prices rising as supply was hampered by poor planting conditions.

I advised that patience was required as Friday brought an important grain report of planting intentions and current storage conditions. The outcome of the report showed that CORN ACREAGE would be much higher than expected while SOYABEAN ACREAGE was much less than predicted, which was opposite of what most hedge funds had positioned themselves. As a result, corn prices fell hard while bean prices rallied.

The grain markets open at 7:00 p.m. CST Sunday so watch how the market reacts to the China news. There will be many ways to play in the grain markets from futures to options to agricultural stocks. The positive outcome for speculators is that AG stocks have been underperformers, which provides a much lower risk profile on any fundamental basis, although it certainly appears that the management of ag firms has been less than stellar.

The outcome from the Trump/Xi meeting OUGHT to provide added impetus to the equity market after Friday’s month- and quarter-end surge, but I would not chase this initial positive response. Gold ought to underperform as the market had a powerful rise in June and is susceptible to a correction. However, I warn that the GOLD move has little to do with tariffs as it rallied in response to central bank actions. The first leg up in GOLD was a response to ECB President Draghi’s promise to ensure that interest rates were seen to have room for further moves lower. Unlike in physics, central banking has no concept of ABSOLUTE ZERO. The GOLD rally that took out long-term resistance was powered by Chair Jerome Powell’s press conference following the FOMC meeting.

Now, it may seem that a perceived positive outcome on the U.S./China trade war will provide more room for the FED to remain on hold rather than cutting to buy INSURANCE against a tariff-induced slowdown, as well as be more data sensitive. That means we should see a backup from recent lows in U.S. yields. We will watch the markets carefully on Sunday night to what see where U.S. interest rates go in response to the POSITIVE TRADE NEWS. If U.S. yields rise significantly it OUGHT to send the DOLLAR HIGHER and GOLD LOWER. Watch to see how precipitous the DOLLAR move is before taking on too much risk. The dollar’s recent break below the 200-day moving average is an interesting pivot.

The price action in the bond markets will be worth watching, because at these levels many traders are asking, “Who could buy these bonds?” The short answer can be found in a 1980s article by Richard Dennis in which he coined the phrase the SLOWER FOOL THEORY. This means investors and traders buy debt because they believe they can exit the trade ahead of a slower fool because of better knowledge.

So who could possibly be purchasing the negative yielding sovereign and corporate bond debt — which has surpassed 13 trillion dollars in net value? Well, as long as the central banks — looking at you ECB and BOJ — keep pressuring bond buyers to live on the HOPE of continued intervention, there will be buyers.

If the FED were to be truly data dependent then the US would be raising rates if the economy strengthens. That would send the DOLLAR higher, raising the fears of Trump imposing tariffs in response to a strong currency. This is the dilemma foisted on the global financial system by central banks seeking to exert ever more influence on the movements of markets. Draghi is the unstoppable force meeting Trump, the immovable object. European interest rates are at RIDICULOUS levels as Mario the Magician succeeds in pursuing lower for longer.

Germans and others are being financially repressed beyond any modicum of reason in a non-authoritarian financial system. But as Bernanke, Yellen and Draghi have advised — and Monty Python sang — ALWAYS LOOK ON THE BRIGHT SIDE OF LIFE.

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20 Responses to “Notes From Underground: When a Slower Fool, Always Look on the Bright Side of Life”

  1. Guy Williams Says:

    Outstanding Yra.  Thanks for the information.

  2. pgrommit Says:

    The following is from Doug Short’s article “History Rhymes”. In it he compares the lead-up to the GFC to what’s now going on in China’s debt markets.
    https://seekingalpha.com/article/4272799-weekly-commentary-history-rhymes
    “The solution, of course, is for China to simply inflate its way out of debt trouble – just like everyone else. What an incredibly dangerous myth the world fully bought into. Reflation – in the U.S., China, Europe, Japan and globally – has only inflated the size and scope of Bubbles. China could see $4 TN of new Credit this year – debt of increasingly suspect quality. Such reckless Credit excess is placing the Chinese currency at great risk. It took about 18 months from the initial U.S. subprime blowup to full-fledged financial crisis. While one could certainly argue for earlier (i.e. December), China’s crisis clock began ticking no later than with last month’s takeover of Baoshang Bank.”

    For all the talk about how “opaque” things are in China, he presents a very transparent view. And since most of you here have a much better understanding of debt mkts. than I, my question is, is he on to something here?

  3. David Richards Says:

    Yra, I’m sceptical that US interest rate differentials are enough to rescue a dollar that IMHO (technically) is headed significantly lower.

    Given current levels of US interest rates and the cost to hedge the weak dollar, it’s a loss for those outside the US on a currency hedged basis, and getting worse. Ms Watanabe and most others around the world are increasingly financially better off by bringing or keeping their money in their homeland instead. Even if the dollar were to level off rather than continue its overall downtrend as I expect. Adding the currency losses to dollar holders, which are now starting to bite, hugely overwhelms US interest rate differentials against other DM, and for many in EM, it’s been a no-brainer.

    Simply, Trump wants rate cuts. Trump wants a weaker dollar. Trump wants higher stocks (nominal value, anyway). The Fed appears to me like beaten dogs with little independence and credibility. Charts suggest to me that Trump will get what he wants. Especially as the Fed has more room or “ammo” for rate cuts and QE than its main CB rivals. So cut they shall. If not under Powell, then subsequent to his demotion, under new Fed Chair Draghi or Kashkari.

    • yraharris Says:

      Dave–as usual you are ahead of me and stealing my thunder—that is why I advise that the 200 day m.a. on the EURO and dollar index provides a good pivot scenario—also I would advise watching the Gold/Silver ratio here to see if silver can gain some traction as it has badly underperformed.Kashkari is waiting for my next Blog as he has raised the politics inside the FED to a new level

      • David Richards Says:

        Yra, we caught your Kashkari comments on the last podcast that you posted and it was quite perceptive along with the discussion about the grains. China claimed to extend an olive branch last week by buying US beans and beforehand by raising the yuan 100+ pips. But in fact, USD was falling anyway and also China needed to buy grain, just as US needed to resume semiconductor sales to China to help US semiconductor companies. So these acts of “goodwill” were also self-serving.

        US ag has a big opportunity here to re-seize a coveted asset: 900-million middle-class consumers in mainland China who eat well. Opportunity knocks as African swine flu ravages China’s livestock and the newly-invasive American armyworm is destroying crops in China and now its neighbors too.

        In addition, last week China banned imports of all Canadian meat and meat products (except seafood) due to the Chinese discovering the presence of ractopamine in Canadian imports, a genotoxic growth chemical banned in 160 countries including China (but not Canada), shipped with false Cdn gov’t certificates that the meat was ractopamine-free.

        Further, Brazilian competition to the US appears to have cooled, because SCMP reports that Brazilian president Jair Bolsonaro is suddenly no longer on speaking terms with China, because Bolsonaro feels he was snubbed at the G20 when Xi was very late to attend their prescheduled meeting. After waiting too long, Bolsonaro departed the G20 before Xi showed up for their meeting, stating he had to leave to catch his flight back to Brazil. So at least for now, Brazil seems less interested in selling ag to China than Brazil was before the G20 (or else maybe not until after an apology from Xi and higher prices?)

        Altogether, opportunity beckons for US ag in the huge Chinese market. But a fly in the ointment for US farmers per SCMP is Chinese fear the US gov’t could sometime abruptly weaponize/ban US farmers’ exports (an unintended consequence of the Huawei ban that has nothing to do with farmers). Thus, China reportedly will buy more from US, but seeks a price incentive (read discount) relative to other “more trustworthy” suppliers. Pity the farmers, who despite spending many years building trust in the Chinese market, seemingly now somehow keep paying the price for others.

      • yraharris Says:

        Dave–right on top of it as always—Smalls you are killing me but as always thanks for your wonderful input and the lengths you go to in an effort to educate and enlighten the readers of Notes From Underground

      • David Richards Says:

        Yra, I and others no doubt look forward to what you may eventually opine about Lagaarde for the ECB, and the two Fed Gov nominees. From what little I know, which might be wrong, I find the choice of nominees for the ECB head and EU President to be very disappointing.

      • yraharris Says:

        Dave –my views on Lagarde are to analyze that this is a huge mistake and will be met with the same kind of failure that resulted from all the elites cheering Neville Chamberlain –not war but a major policy failure resulting in political and economic instability–when the insiders cheer it is time to get nervous—for proof see the election of Trump as the ultimate failure of a myopic elite coddled by the G20/G30 Bilderberg and of course the monied relationship between Washington and Wall Street

  4. richard dreisen Says:

    Thankfully there is someone like you that not only understands these financial complexities, but also can explain them to me (and many others)! Job well-done as always !!!

    • yraharris Says:

      Richard–thanks and you add so much to my understanding of real estate and finance—thanks for elevating my knowledge base

  5. ANDREW PERRY Says:

    Is gold not a better option gents, and especially this morning as they are selling it for the wrong reasons. That is agreed, the Fed is the next target and if there is a move there, then what stops Gold?

  6. David Richards Says:

    Those big surprise beats in both ISM Mfg and ISM employment today, if they keep up (next is Services and NFP), creates an interesting dilemma and test for the Fed later this month to show whether the Fed is actually “data dependent”.

  7. ANDREW PERRY Says:

    Yra, I have a question, sir, you mentioned the gold silver cross. If we start to see Silver perform, what historically does that tell us ?

    • yraharris Says:

      Andrew–it has traditionally told us that a metals move ,precious metals ,is beginning to assert itself.The present value of the gold/silver ratio is historically stretched and there have been many articles discussing this as many are wondering why silver fails to perform.It may be that the algo correlations weigh silver much more as an industrial metal as even platinum has badly underperformed Gold sending that relationship into historical anomaly —the power of AI and the traditional correlations is one of the interesting developments I am seeking to comprehend—but many are waiting for silver to begin its ascent as it is a precious metal and historically a poor man’s store of value.Some shout Remember the Maine but the Chinese declare to remember the opium wars and Britains desire to devalue silver to bring China to its knees—and today being the 4th of July let’s recall William Jennings Bryan and the Cross of Gold speech at the 1896 Democratic convention

  8. Michael Temple Says:

    Yra
    Slower Fool Theory

    I am not sure that bonds are necessarily the playthings of slower fools.

    This is a GLOBAL phenomenon, and while it may seem of bubble proportions, I think the bond market “sees” something that the equity “slower fools” do not.

    Virtually all trade/commerce data point to slowdowns. And while Trump has now called for a truce with Xi, that is NO PROMISE of a deal any time soon. Ergo, confidence and actual commerce not ready to rebound between the two, imo

    Meanwhile, Trump continues to hector/badger EU with additional tariffs, as well as threatening Viet Nam and Australia.

    While stocks partied higher on the two new Fed dove nominations (and perhaps also Lagarde replacing Super Mario), bond markets lurched to new low yields globally.

    Which is the bubble? 10 yr bunds at neg 40/French 10 yr OATS below zero/Italian 2 yr below zero OR S&P at new all time highs of 3000?

    Maybe they both are bubbles. But, stocks seem to be up because of “easy” money while bonds are UP because of horrible growth/slow down data.

    Gold, too, is sending out its first REAL message in over 6 years as it has convincingly broken out above the Maginot Line of $1370ish resistance.

    While we all enjoy today’s festivities, the BIG fireworks may come with tomorrow’s NFP.

    Trump has clearly stated that he wants a lower USD and lower interest rates. Just judging by his track record, he has been quite successful in getting what he wants.

    Putting aside your political views, he has successfully

    1. Gotten his wall, as Pelosi has folded.

    2. Has withdrawn from Climate Accord and Iranian Deal

    3. Has successfully waged economic war on Mexico, Canada and
    China, even if he hasn’t fully “won”

    So, why does anybody think that he isn’t going to win in his battle with the Fed/Powell to debase the dollar and lower interest rates.

    Trump almost never FOLDS/RETREATS……I think gold has “gotten that memo” and most algos are too myopically focused on the rearview mirror of all stocks 24/7 to have noticed the GREAT SHIFT that is afoot.

    Happy 4th to one and all

    Mike

  9. Michael Temple Says:

    Yra
    One last point

    The global trade slowdown is, I believe, exacerbating the global USD shortage which is what has been animating global bond markets for the past 6-9 months.

    The trade slowdown pre-dates the China Talks/Snafu.

    Trump’s mercantilist view of trade deficits as being bad and taking tariff actions to “correct” this is causing a trade slowdown which is causing de facto tightening.

    THIS, I believe, is what the bond markets and the RED EDs have been picking up on and have been pricing for the past 2-3 quarters.

    Equities are playing the fool to the wise sorcerer of the bond market.

    Again, consider the very HUGE fact that the Fed cannot even control the EFF as it continues to trade at higher yields than the IOER. And, again, the bond market is kicking sand in the face of the Fed with even the 30 yr now inverted to the upper-range of the Fed’s 2.25-2.50% Fed Funds rate.

    The slower fool is the S&P, not the UST 10 yr or even the German 10 yr bund at neg 40 bps.

    Just my 2 cts

    Mike

    • David Richards Says:

      Mike, I think a major cause for EFF trading above IOER is the large US deficit that both the foreign official sector and private sector investors are baulking at funding now, especially with these lower yields (which this year are increasingly negative on a currency-hedged basis to those foreign holders), so the Fed will have to fund the US and lower interest rates for US gov’t finances to not fail.

      The key knock-on effect is a weakening dollar, which will continue to weaken if those circumstances persist. In turn, the combo of lower rates and weakening dollar drive equities higher, both in the US (due to currency devaluation) and abroad (due to lower cost of servicing USD denominated debt and therefore higher profit margins). Deficits begin to matter when they begin to matter, and then there are consequences like this. As I see no appetite for the US to address its huge and rising budgetary deficits, even in the face of funding problems like we see this year, then I retain a short bias against USD, long biases in precious metals and risk assets (with trailing stops of course). Regardless of the bond market “signal”, which is a semi-rigged market anyway. QED.

      And in addition, perhaps long those ED futures? I think you particularly might find this ZH piece amusing about the “trade of a lifetime” in ED’s and how Raoul Pal recollects the story of a trader who made a life fortune in one year in 2001 in ED futures… 18 years later, is the same opportunity knocking once again?…(so far, yes)
      https://www.zerohedge.com/news/2019-06-28/recession-now-inevitable-may-be-trade-lifetime

      • yraharris Says:

        Dave–it is the debt situation that makes me believe that if the market was allowed to preform the curve would steepen as it would BEHOOVE investors to stay away from long term debt and stay as SHORT in duration as possible—Draghi is screwing the markets big time and as I am thinking central banks have read George Kenan and seek to contain markets in a way similar to how the West contained the Soviet Union—-it is not about capitalism but that the central banks FEAR markets

  10. David Richards Says:

    Addendum…I forgot last post. I expect that Mike has been killing it on ED’s for many months. Probably making more than everyone. So steak dinners for all on Mike!

  11. Michael Temple Says:

    David
    I am not so sure that the EFF/IOER anomaly is due to private investors balking at funding now….If it were so, the UST curve would not be inverted and trading near to all-time record low yields again.

    Instead, I believe that there is a dollar shortage/squeeze that is the root cause of what ails the funding infrastructure/plumbing.

    Dodd-Frank has placed a super premium on HQLAs (High Quality Liquid Assets–i.e. USTs) which transcends any “yield” considerations as having USTs could be the difference between a bank being solvent or not in another possible Bear Stearns/Lehman moment.

    Moreover, the twin suffociating measures of the Fed’s most recent rate hike cycle AND QT has eliminated a lot of dollars/excess reserves from the banking system. When you overlay this with slowing circulation of global dollars due to Trump’s mercantilist policies of reducing US trade flows with traditional trading partners (with whom we ran deficits), it is no wonder (to me) that the funding markets EFF/IOER have gone haywire.

    One week after the G-20, the great huzzah of the China Trade Truce has pushed stocks to record highs, and yet global bond yields continued to tumble as doves have been nominated to the Fed and to the ECB, with Lagarde dovishly replacing Super Mario.

    Yes, today’s NFP number has set back EDs and gold, but to my thinking, gold is still well above its important $1370ish break out and Trump is not about to relent in his quest to hector/badger the Fed.

    I think there is some bad “sheet” swirling in international financial circles…..DB and China banking system not so airtight, in my view.
    Turkey is a mess, although admittedly not a major banking center.

    Somehow, I think the first rate cut by Powell will not be his last, much as Raoul Pal has outlined.

    While there is a lot of room for short-term US rates to plummet (again, are Italian 2-years really sporting a negative yield?), I think the more interesting play now becomes gold/silver.

    I think gold has a date with destiny in the $2000s by Xmas 2020 as CBs have demonstrated they are mere extensions of their political masters in Europe and Japan, and I fear that the Fed will soon be subsumed by Trump.

    Stocks are up largely due to “easy money”. But, the easy money should soon become massively easier money, in my view, due to some financial troubles. That ain’t going to help stocks and should lead to greater awareness of the ultimate store of value of gold.

    Best

    Mike

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