Notes From Underground: It’s a Drag For Draghi Getting Old

On Thursday morning we will hear from the ECB about its desires to raise inflation to its self-imposed 2% target. But on Wednesday we received more tepid economic data from the EU. Then couple that with the ascent of Boris Johnson to the position of British Prime Minister. The rise of Boris Johnson is a problem for Draghi as the possibility of a HARD BREXIT increases dramatically. The market and its DAVOS media sycophants have sold the narrative of a hard Brexit as being devastating for the U.K. economy, the British GILTS, the British pound and the Footsie 100. President Draghi has to be careful that a severe rally in the EUR/GBP cross doesn’t damage the European exporters, especially Germany, who runs a 50 billion-plus surplus with Britain.

Also, German auto makers have important supply chains with U.K. manufacturers. A move to new highs in the EUR/GBP cross would cause more pain for Europe–three-year high is 0.9400 and is currently trading around 0.8975. Boris Johnson, with help from President Trump, can create problems for the EU, especially if Trump enacts a free trade agreement.

This only adds to the reasons Draghi could enhance the QE program. I doubt that the ECB will actually get rates because that would raise concerns about changing the current system to a complicated TIERED program. But this would provide room for President Draghi to increase bond purchases, as well as embark upon QQE by buying more corporate bonds, as well as certain equities.

The ECB has damaged EU bank stocks so a program to purchase FINANCIAL STOCKS may assuage some of the long-suffering European bank equity shareholders. It is not a coincidence that in the last five days Larry Fink and Rick Rieder of Blackrock have both been writing and commenting on the need for the ECB to begin buying equities to put onto its balance sheet. (A QQE in the image of the Bank of Japan.) It is a pathetic commentary on where the global financial system resides when the world’s largest asset manager promotes the purchasing of equities by a major central bank. It makes a farce of Chairman Jerome Powell’s comments about looking to MAIN STREET.

Regardless, the fear of a hard BREXIT does provide cover for President Draghi to entertain more powerful tools. Lower for longer is the guidance, which provides further reason for the FOMC to be even more aggressive. Chairman Jerome Powell and his vice chairman have instructed us to look at the global economic picture rather than solely U.S. data.

The end result is that monetary policy is being formulated in Frankfurt, so pay attention to the man behind the curtain. The Italian 10-year yields have dropped to 150 basis points versus the U.S. 10-year of 205 basis points. The ability of the ECB to distort markets has no precedence so this time it really is different! If Draghi is aggressive in beginning a new QQE effort it will mean the U.S. short-end OUGHT to rally as the discussion of a 50 basis cut next week will gain ascendance, again.

The GOLD ought to rise to new recent highs, if my view gains traction. The DOLLAR will rally but listen for President Trump to begin tweeting about ECB intervention. The EQUITY markets rallied Wednesday with earnings and a little positive news about the trade war, Fed expectations shift toward 50 basis points, then we will initially get another lift. Also,watch the yield curves because the 2/10 and 5/30 OUGHT to steepen.

***Last point: On July 19, CNBC interviewed Boston Fed President Eric Rosengren. Rosengen was solid in his stance that the FED doesn’t need to raise rates at the coming meeting for there was no SUBSTANTIAL UNCERTAINTIES to provide a reason for a FED cut. Just 40 minutes before the Rosengren interview, CNBC spoke with David Rosenberg. He maintained that the FED OUGHT to cut as the recent FOMC MINUTES had used the work uncertainty or risk 48 times in a 12-page release. Evidently Rosengren was not at the meeting as was recorded in the MINUTES.

Also, Rosengren maintained that the efforts by other banks to be aggressive rate cutters and stimulus providers was because they had different unemployment situations. WRONG! The Germans, Japanese, Swiss, Aussies, Kiwis and Canadians all have experienced strong labor markets.

I am aware that several EU nations have elevated levels of unemployment but that just begs the continued question: WHOSE EURO IS IT? How does the ECB set an effective policy for a dysfunctional union? German unemployment is at its lowest levels in 30 years while its 10-year BUND is yielding NEGATIVE 34 BASIS POINTS. It makes investors wonder about the efficacy of the PHILLIPS CURVE.

The bottom line is that German savers will continually be suffering the financial repression of the dictates of the ECB. Good luck, Christine Lagarde, as Mario is providing quite a welcome gift.

Tags: , , , , , , , , , , ,

14 Responses to “Notes From Underground: It’s a Drag For Draghi Getting Old”

  1. Michael Temple Says:

    Hard not to agree with every point you make.
    You know how loudly and incessantly I have been pounding the table
    about Red ED futures (my June 2020s are no longer Red, but are sufficiently long enough for my tastes) as the Fed prepares to take us to DEFCON 3 on its way to DEFCON 5 (ZIRP) in rate cuts.

    However, all that is now swirling with the ECB and the new BoJo administration in London underscores to me how out of whack monetary and financial conditions are, especially as we behold Greek yields plummeting towards 2%, Italy trading at 1.50%ish, and German bunds incomprehensively trading at -34 bps.

    In short, the background could hardly be more propitious for gold.

    Put me now in the camp that says that not only is gold supremely cheap, but I expect a torrid rally to commence sometime shortly after the Fed speaks next week…Heck, depending on what Draghi says and does tomorrow, gold may catch a new strong bid by late tomorrow.

    I think there is a chance the Fed cuts 50 bp next week. If not, I think a 25 bp cut will cause consternation in stocks, which may jolt USTs towards much lower yields, which revs up gold wags all over again.

    In short, I look for gold to commence a spirited new run up that takes it well above $1500 by end of September.

    Stocks may go along for the ride, but I think the easy money now is to be long the PMs and the major miners as the silliness of what global bankers are doing and may yet do begins to redound to the benefit of gold, an asset that is still severely under-owned by virtually
    all major institutional investors. The price action in many leading gold miners is astonishingly strong, heralding much larger price gains ahead for bullion, itself.

    I also read a report which highlights that nearly 13% of all European high grade debt trades with negative yields. Even Petrobras has Euro denominated debt with negative yields.

    Give me gold Give me gold Give me gold. And, give me some silver



    • yraharris Says:

      Mike–your plea makes no doubt as to your last name—-everything in gold and shekels reflects the table for the show bread–all puns intended—see you in August

  2. Trader1 Says:


    “How does the ECB set an effective policy for a dysfunctional union?” — “The bottom line is that German savers will continually be suffering the financial repression of the dictates of the ECB.”

    AND now the FED ‘third mandate’ of Global Growth has the USA Saver helping bail out the ‘dysfunctional union”

    Question: Knowing Lagarde is a politician what do you think her first move will be as ECB head??

  3. yraharris Says:

    Trader—that will be a major question–it may be abdication as she begins the understand the mess left in the Augean Stables –it will be a herculean task that not even the rushing waves of liquidity will capable of cleaning up

  4. asherz Says:

    Yra- Really excellent post.
    Many of us grew up making investment decisions based on fundamental security analysis. Those who were good at their craft prospered. Those who were not, failed. Today when 85% of trades are determined by black boxes, the markets no longer function as they were supposed to. When a major asset adviser urges Central Bank purchase of equities, (debt purchases are now a given), distortions such as Greek and Italian bonds, or $13 trillion in paying governments to hold your money, becomes reality. What will historians say 100 years from now? We still speak of tulips, the South Seas and Mississippi. Nothing compared to the insanity in the markets today, all thanks to the OCEAN of LIQUIDITY created by our genius money printers. The Augean Stables may have been cleaned out, but rotting fish abound (using your apt metaphor).

    On another subject, look for the colonies getting even closer to their Anglo Saxon cousins. Yes a free trade agreement with the touseled hair PM in return for more help in areas of potential conflict around the world including Hormuz and Syria, and leaving the JCPOA.

    Bottom line, tough trading markets for the younger generation. The abandonment of brain power in favor of cyber power has reduced the human element in the investment business.

  5. Michael Temple Says:

    You make a very salient point about the incredible rise of non-carbon based investment making decisions by the black boxes and how utterly insane the mania for such algos/robots is more intense than the famous historical tulip manias etc.

    Hence, the reason why we have such stupendous valuations in sovereign bonds and stocks, globally.

    So, here is the rub, and why I am now shifting gears into a very UBER bullish view on gold.

    In order to keep all the plates spinning, CBs will stop at nothing to keep defying the laws of commonsense investing which have ruled for decades/centuries—-earnings, cash flow, etc etc etc

    Those metrics have been thrown out the door as the algos only care whether the Fed and other CBs are easing, regardless whether the easing can heal what ails economies, such as trade wars and overextended economies dependent on ever more sugar highs of cheap money.

    So, either CBs continue to slash rates and beggar thy neighbors with lower currencies to keep stocks moving higher but moves gold even higher still, OR CBs FAIL to hold back the tide and stock markets hit
    another Q4 disaster.

    Only this time, the next stock market sell off will be met by full stop emergency measures as Powell finally capitulates and follows the rest of his CB brethern as he takes the USS Federal Submarine below the water line of zero interest rates.

    In that scenario, gold finally goes ballistic sometime in the next 6-12 months as this plays out.

    While RED EDs may approach 99+ and talk of even “par” handles will abound, gold will ZOOM. And, once the logic and rationale of gold becomes self-evident, just wait for the pyrotechnics when the algos/robots come storming into the gold pits and gold mining stocks.

    I daresay that silver (the poor man’s gold) will put in a future performance which will inspire comparisons to bitcoin. For if gold is cheap and soon to become the darling of many investors’ eyes (CBs certainly have been gobbling it up in the past 18 months at a pace not seen since the late 1960s), silver will EXPLODE as that same impulse courses through its much tinier market.

    Time to see what Mario has in store for his parting gift.

  6. Don H Says:

    /GC As posted earlier, Bullish above 1411. However, Buyers need to regain bid above 1440 for continuation, IF so, 1470 initial target.
    /ES has continued higher as posted earlier. New ATH as I post this. 3027 target anticipated b4 I click send.
    Yra…thanks for welcoming my .02

  7. yraharris Says:

    FROM YRA—the idea of counterfactual as the key element of all of Draghi’s work—this is an example of him controlling the NARRATIVE and the headlines that are sent out lack context as the distillation of everything he says is UBER dovish—the EU bond futures traded on the headlines Secular Stagnation discussion is “red ” herring”

  8. Arthur Says:

    Since the euro was introduced, over 20 years ago, Italy has steadily fallen behind the rest of Europe. The average citizen in Germany, France and Spain is a fifth better off, in real terms, than in 1999; incomes in eastern Europe have more than doubled. BUT THE AVERAGE ITALIAN IS NOT RICHER.

  9. A.M. Look 7/25/19 | Says:

    […] Yra posted his thoughts last night. […]

Leave a Reply