Notes From Underground: Torn Between Two Lovers, Feelin’ Like A Fool

This Mary MacGregor ballad released in 1976 notes how a woman is torn between two men she loves and it is “breakin’ all the rules.” This is the situation Federal Reserve Chairman Jerome Powell and the FOMC finds itself: The love of its dual mandate and its torrid affair with the beloved Phillips Curve. Now it appears that the FED leadership is abandoning its affair with Phillips Curve while it grows more attached to its other love, Mario Draghi and the European Central Bank.

Vice Chairman Richard Clarida has laid the groundwork to arrange the tryst with Mario Draghi as the FED‘s research has revealed that the yield differential between the U.S. and Europe can only diverge so far before it will harm the U.S. economy.

This week brings another ECB rate decision with President Draghi entertaining the financial media with a magician’s deft touch with a jester’s success of obfuscation. (NOTE: I doubt the ECB will cut rates although we may hear about some effort to increase corporate bond purchases or open market buying in European equity markets. So no rate cut but enhanced QE.)

It won’t matter to the FED for the tryst has already been consummated via Powell’s Paris speech, New York Fed President John Williams’ remarks on Thursday and Clarida’s interview on Fox Business. The New York Fed on Friday tried to walk back the impact of Williams’s remarks, referring to the speech as academic, but there can be no undoing. Especially when Williams said “current estimates of neutral rates in U.S. around 0.5%.”

The because of the walk-back, precious metals, bonds and the yield curves — along with the dollar — rolled back Thursday’s price action. Even the S&Ps saw a late selloff as the market began to accept that the FED’s next action would be a TEPID 25 BASIS POINT CUT rather than the 50 basis points the market sensed on Thursday.

For Notes From Underground, it’s not an issue of a 25 or 50 CUT but the larger significance that the FED‘s policy has become unmoored from its long-held models. The DUAL MANDATE IS DEAD AS IS THE PHILLIPS CURVE, a difficult situation in that the FOMC has made a $4 trillion investment in what they admit is a flawed compass for  navigating the sea of liquidity created by the world’s central banks. As always, I maintain that it is GOLD‘s sense that the central banks are adrift in a fiat currency world. To those that posit that GOLDBUG is a pejorative concept I rebut with the wonderful piece by Jim Grant in Barron’s about the success of the PhD standard of monetary policy. I ask, WHAT IS A FIAT CURRENCY BUG???

***Two areas of  concern while I was on hiatus:

First, there have been several articles hinting at a direct intervention by the Trump administration into the currency markets. In a Financial Times article from July 11 said “Goldman Sachs has become one of the highest-profile investment banks to warn that there is a growing risk the Trump administration will intervene in the currency markets in a bid to weaken the dollar.” Later in the week Pimco analysts issued a similar warning, as did other global banks. It is certainly something to be vigilant about because the talk is coming from some administration sources;

Second, a separate FT article from July 11 discussed the issues with a disappearing bund market. This is an issue we’ve discussed in Notes and with Rick Santelli as a reason to be long BUNDS but short other European sovereign debt in its place. In the workings of post-financial regulation, there is a natural need to own the highest quality liquid asset, THE BUND, a difficult proposition when Germany is running budget surpluses and the ECB currently owns a large stockpile. As the article confirmed, bunds “are the eurozone’s benchmark safe asset. If there are not enough of them around,banks could run short of high quality collateral for lending, while the ECB will struggle to find enough bonds to buy if it wants to revive its quantitative easing programme to combat a downturn.”

This is a very serious issue as it will force President Draghi to either violate the Capital Key rule of the ECB’S QE program and force the ECB to buy GERMAN equities/or corporate debt, or maybe even Deutsche Bank stock. If the ECB is LYING about the construct of its balance sheet in regards to the capital key, look for German citizens to head back to the German High Court for some resolution. That will again open public critique of the ECB policies and elevate the stature of Bundesbank President Jens Weidmann. Christine Lagarde is inheriting a potential firestorm.

Is the only way out a EUROBOND created by consolidation of the ECB balance sheet?

Torn between two lovers also applies to Europe. The lack of credibility for any central banks is a liability not directly on the BALANCE SHEET.

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7 Responses to “Notes From Underground: Torn Between Two Lovers, Feelin’ Like A Fool”

  1. ShockedToFindGambling Says:

    Yra….great article.

    It seems to me that the stock guys are mostly saying the same thing……stay long because the FED will be easing and most people/institutions are under-invested in stocks.

    I think that Gold is saying the rally in stocks is near an end….why would you buy Gold, if income producing assets are going higher. ………People are buying insurance.

    The reaction of stocks to Williams/Clarida on Thursday/early Friday looked weakish, to me.

    • Don H Says:

      Agreed STFG…Yra is always here making sense of the nonsensical. From a tech view…watching 1411 IF tested on this /GC pullback. Bullish above with a 1470 target; a break below 1411 beforehand, then I’d anticipate lower. /ES line in sand for Buyers to defend 2949 for continuation at these levels.
      My .02

      • yraharris Says:

        DonH–thanks for the add –your .02 is welcome here as it may lead to some profitable input and conversation from others

  2. Rohr (Alan Rohrbach) (@MacroMeister) Says:

    A very important in-depth discussion of the basic proposition:
    Germany is content to pile up more mercantilist chips and say to everyone else, “You ought to be more like us”, even though that is not possible and regardless of the cost to the rest of Europe (and the world) of their parsimony.
    This is not news, but thanks for your expert exploration of the details once again.

  3. Bosko Kacarevic Says:


    Another thoughtful analysis, thank you.
    My humble contribution — I believe no government in history has ever paid off their debt, they just default or change the rules (ie- Nixon in 1971), so why CB’s keep buying government bonds is obviously a political decision not financial, especially with such low interest rates. Therefore, investors buy government debt for safety and return OF their money, not return ON their money. Now, it depends on what one considers “money.”
    This brings me to the topic we’ve been discussing for years, “gold bonds.” Consider this, a default in privately issued gold bonds becomes a legal claim to physical gold, which is backed by the business bankruptcy laws of the nation where it was issued, a default of government debt gives you nothing, except war, as it has been proven out in history. Governments have always re-negotiated trade deals with each other, but changing domestic laws which effect the businesses of its own citizens is much different. Therefore gold bonds become a type of hedge on the legal system of a nation and the CB policy of QE?


  4. Rob Syp Says:


    • yraharris Says:

      Rob–sorry I am never iimpressed by the sales personnel to create acronyms for a trading strategy–cute but I be not a fan

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