Notes From Underground: The August of Our Discontent

When August rolls in the markets thin as Europe heads to the beaches and New Yorkers head to the Hamptons before Labor Day. This means every tweet President Trump is amplified by the LACK of market liquidity. On Wednesday, the president was back in full confrontation with Federal Reserve Chairman Jerome Powell because three central banks CUT interest rates last night: India,Thailand, and, most importantly, the Reserve Bank of New Zealand, which surprised most market analysts by cutting 50 basis points instead of 25.

For all of those monitoring the currency wars, the KIWI cut was in direct response to the recent strength of the NEW ZEALAND DOLLAR coupled with rising angst about the unknown outcomes from the U.S./China trade skirmish. Every nation is trying to get ahead of the fallout from trade uncertainties by lowering their interest rates increasing their asset purchase programs. This plays into the efforts of President Trump to affect a greater monetary stimulus program from the FED, which supports my contention that Trump’s tariffs are as much directed at the central bank as they are toward the Chinese. Giving further support to this view is the FACT that GERMAN BUND YIELDS closed today at a NEGATIVE 60 BASIS POINTS.

Nine European nations have 10-year sovereign instruments that are yielding NEGATIVE NOMINAL INTEREST RATES. This is a result of the ECB’s ABSURD POLICY to do whatever it takes, courtesy of President Mario Draghi. What exactly is the desired outcome that Draghi is trying to achieve? It is either to sustain a relatively weak currency or a surreptitious effort to force Brussels to undertake a massive FISCAL stimulus program, even though it is the individual EU nations that control fiscal policy. Whichever it is, the outcome helps maintain a weaker EURO in which the Trump administration can claim the EU to be a CURRENCY MANIPULATOR, invoking countervailing tariffs or a trip to the IMF arbitration panel.

WHY IS ONLY CHINA SINGLED OUT? Wednesday’s assault on the global interest rate complex that followed on the heels of the RBNZ aggressive rate cut amplified fears across many asset classes. The great concern is that central banks are losing control and therefore their credibility. In a FIAT CURRENCY-based world this is the ultimate calamity. The precipitous drop in yields, especially in Europe, is a recognition that the ECB has corrupted the financial system and there is no way out. European banks are struggling to profit in a negative interest rate environment with no ostensible EXIT strategy.

If bank equity values keep declining at some points banks are going to have to issue more equity to sustain tier 1 capital levels. This is going to raise concerns over COCO bonds (short for contingent convertible). Institutions issued these hybrid capital instruments in an effort to entice investors to buy a security that allows banks to increase tier 1 capital ratios by converting BONDS to EQUITY, which turns a fixed income investor into an EQUITY investor. This is all done at the discretion of the BANKS. In order to prevent a massive dilution of bank investors, look for the ECB to embark a QE program of purchasing bank stocks as its next efforts to increase monetary stimulus.

The question for investors across the financial spectrum is how a massive COCO redemption will affect sentiment? Wednesday’s BOND prices were a complete statement about central banks losing their credibility and thus control in a realm of massive balance sheet inventory.

As the Pointer Sisters sang:

I want to love you, feel you
wrap myself around you
I want to squeeze you, please you
I just can’t get enough
And if you move real slow,I’ll let it go
I’m so excited, and I just can’t hide it
I’m about to lose control and I think I like it.
This certainly captures the relationship between central banks and global investors.

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

26 Responses to “Notes From Underground: The August of Our Discontent”

  1. kevinwaspi Says:

    I’d propose a Pointer Sister’s prescription to central bankers that goes like this:
    I want a man with a slow hand
    I want a lover with an easy touch
    I want somebody who will spend some time
    Not come and go in a heated rush
    I want somebody who will understand
    When it comes to love, I want a slow hand…..

  2. Michael Temple Says:

    In order for CBs to seize back control, they have to throw the kitchen sink at this.

    ECB has to bail out the banks because if banks activate COCOs, investors will panic, even though they knew what they got when they bought them.

    Gold is springing to life as investors realize that a world of negative interest rates is illogical and a fun house of mirrors. Instead of locking in negative returns, bond investors ought to seek out the “zero interest” coupon of gold. And while they will never be able to do it, Mining stocks are poised to deliver zip code.

    If, as your daughter wrote, the Fed is actively considering implementing QE4 in Q4 as BoA suggests, then gold goes ballistic to $1600/1700, imo

    With so many spinning plates everywhere you look, gold’s prospects have never looked better.

    • Bosko Says:

      Did I hear “zero interest gold bonds,” the solution is available for those that seek it, just ask Yra. In January the BIS classified gold as a “tier 1” risk free asset for member banks, I wonder if they are taking advantage of this?

    • Don H Says:

      /GC has traded the 1530 target today. IF Buyers hold their bid, on this pullback, above 1510, then 1539 target. IF 1510 fails, then anticipate a deeper pullback.
      My .02

  3. asherz Says:

    Besides COCO redemptions there is another device that is on the books and saves from bank failures.
    The Bank BAIL-IN. Cyprus has already used it. So when the conservative investor decides to liquidate his securities and stash his hard earned savings in his bank, he doesn’t realize that beneath grandma’s night clothes there lurks a wolf.
    Where to hide? We know the answer to that one.

  4. asherz Says:

    These two Zero Hedge articles are of importance.

    • yraharris Says:

      Asherz—they took that right out of the work of Alexandra Harris at bloomberg

    • yraharris Says:

      Asherz–it was not plagiarized by Bank America they were the great conduit of knowledge it was Zero Hedge that published it well after the article she wrote was released—Bank America did wonderful work as shown by the market grabbing on to the great work of Mark Cabana and his staff—they were spot on as he market proved.Bank America holds its head high and such work makes all investors and traders work easier especially as it is shared in the public domain

  5. Trader1 Says:


    Is there any chance Central Bankers around the world step back and take a look at themselves and say hey we’ve just reached peak insanity??? Like whats the key metric for them to stop?? Neg -5% 10 yr world wide yields?? or neg -10% ??

  6. Financial Repression Authority Says:

    […] Link to the Article […]

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

    Yeah, COCOs… another great idea from the same folks who brought you blended Mortgage Backed Securities: how to fund junk with a high enough yield to attract the gullible public.
    Agree with all previous comments on the sketchy nature of a security that converts from staid old debt into equity. And it is doubly disturbing that this soon after the Housing and Credit Bust there are financial engineers (such as they may be) putting the health of the banks back at risk… and this time with the blessing of the central banks (instead of just their previous ignorance.)
    Agree with Asherz on the risk of more extensive BAIL INs… so it looks like GOLD or the MATTRESS.

  8. Pierre C Says:

    I find it ironic that the very entity that was created to help failing banks and safeguard against panics as the lender of last resort, may now become be entity that kills them.

    • yraharris Says:

      Pierre—it has been a coup as the only game in town has seized control of monetary policy and thus enhanced fiscal influence

  9. Bosko Kacarevic Says:


    As central banks are losing their credibility, I think it will open the door for a more “sound” monetary system which includes gold and silver in some way? It seems like the perfect time for private gold hoarders and sovereign nations to step up to the plate and put their “gold-in-motion,” to help save the system, either through private debt or gold backed government bonds. As you have been saying for some time, the EU should offer a EU bond, but imagine if they through in a little gold with that bond? Exciting times are ahead of us and when the dust settles I believe gold will shine as the final solution.


  10. Michael Temple Says:

    Good early morning.

    The alarm bells must be deafening inside the Marriner Ecles Building as the bond and gold markets are eviscerating the credibility of Powell.

    Equity investors are out to lunch as they still haven’t received the memo and ask not what the big message is that bonds and gold are trumpeting.

    In brief, the Centre cannot Hold (Yeats).

    Almost daily, the world is dealing with serious economic and geopolitical instability. We all know the risks and danger s of HK, Italy, Iran, Brexit etc etc etc
    But, did anybody see Argentina coming? Not that Argentina matters much on the international stage, but it was still a surprise.

    2/10 down to 8 bp is a shocking indictment that Fed is too tight. Mid cycle adjustment my a*&(.

    3M/10 yr inverted by 30ish and 30 yr UST yield at the mid point of FFR.

    I have said it before, and will say it again. The CBs are going to have to throw the kitchen sink at thiis problem of plung8ng yields and crashing stocks. Big rate cuts are coming and I think we don’t make it to Labor Day without a Fed cut.

    Gold seems to be sniffing this out.

    Gold is insurance that lets you sleep at night. I think “smart money “
    Is beginning to cotton to that thinking, especially as the absurdity of negative yielding sovereign bonds seems bubblicious, even if we don’t know when the music stops.

    If/when that dam breaks down the road, gold goes stratospheric.

    Silver, too.


  11. asherz Says:

    Unfortunately I have been agreeing with the thesis you present. But let us all not get too jubilant, those who have put their money where their mouth is. Think about what the world will look like. You quote from Yeats. Here is the first part of that poem.

    Turning and turning in the widening gyre
    The falcon cannot hear the falconer;
    Things fall apart; the centre cannot hold;
    Mere anarchy is loosed upon the world,
    The blood-dimmed tide is loosed, and everywhere
    The ceremony of innocence is drowned;
    The best lack all conviction, while the worst
    Are full of passionate intensity.

    Don’t cry for me Argentina… I cry for you and all you portend.

    • yraharris Says:

      Mike and Asherz—-great add to yet again and I will sum this up with much work from these archives—Ben Bernanke et al are 1937s and have put their entire careers into preventing deflation from ever taking hold—-Powell the ball has been left in your court—and the court has been shrunk by the efforts of Mario Draghi—you do the math but if you want my advice –no don’t go back to Bulgaria ,but rather an emergency cut as soon as possible to allow you to remove yourself from the pendulum that is swinging and searching for your head–the credibility of all central banks is now on the line regardless of what Jim Craemer says

  12. Michael Temple Says:

    Good morning,
    Please know that I do not take joy in the misery of others.
    Schadenfreude is such a perfect description of that.

    I truly do not.

    But, after too many years on Wall Street, I understand (or at least I think I do) when markets suffer cognitive dissonance.

    Equity land is so divorced from bonds right now. CNBC et al have been looking in all the wrong places as Yra has highlighted ad nauseum as Rome has been burning throughout global bond marts.

    What we are witnessing with global bonds is epochal. SIdney Homer never dared dream of negative interest rates. And, yet, here we are. Madness, especially when negative rates NEVER uplifted the real economies, instead pumping up stocks and bonds.

    So, yes, I foresee a Yeats-like disaster of chaos as the Centre cannot hold and the falcon lost from his falconer.

    But, not just yet. We saw $1900 gold in 2011 as FEAR ran through European streets as PIIG sovereign debt seemed ready to implode.
    We got through it because Draghi did throw the kitchen sink at it and QE truly exploded.

    Today, 8 years later and trillions of yen, euros and dollars later of QE, the financial system reached new highs (last month) as all faith in CBs reigned supreme in equity land.

    Trump decides to manipulate markets with his China tariff games and the Pavlovian response is for SP to go ballistic, especially off its oversold readings. But, bonds have called Total BS. 2/10 yesterday was nearly 8 bp positive to start the day, and here we are this morning with an official 1 bp inversion as I type.

    UST 30 yr is 2.05% and threatening a “1” handle.

    Powell is not the Sorcerer. He is The Sorcerer’s Apprentice and spirits have been looked upon the world.

    The ultimate consequences of the absurdity/bankruptcy of QE is, I fear, a very dystopian economic and political future. But, $2000 gold will NOT mark or usher in that dark world.

    I actually think the world and markets will middle through the next 16 months as we barrel through Brexit and, most importantly, US 2020 election.

    Gold will most assuredly hit $2000 over this 16 month timeframe.

    The Yeats-like world of fear and chaos, however, begins in 2021 when all these chickens come home to roost and the US is firmly in the grips and throes of recession and great civil unrest and distress.

    By the end of the next Presidential term in 2024, we will be living in unprecedently bad times. Gold will be a refuge/sanctuary reflecting the chaos that will consume us then.

    Gold will probably be multiples (not just a multiple) of $2000 by then.

    None of us will take joy in reading the morning headlines at that time. Very few people know that Britain required an IMF bailout in the 1970s. Not such a dissimilar future awaits us as a trillion dollar deficit today morphs into $2 Trillion plus in the years ahead.

    On that happy note, I am heading out the door for breakfast with a dear new friend. All is well with the world still.



    • yraharris Says:

      Mike–market conditions prevailed to cancel breakfast as we agree to sense that the FED may make an emergency cut ala January 22,2008 and Jerome Kerviel—-there is precedent Jerome Powell for the FOMC to act inter-meeting.I am LOOKING FOR THE FED TO REACT TO THE CURVES AND NOT TRUMP—-Jerome are you a leader of those with intestinal fortitude or a follower of the spineless parochial forces of wall street markets–stand TALL .You once told me that you believed that the ECB need not worry about its credit standing as it has a printing press—-what do you have in your tool box

      • Joe M Says:

        Yra, thank you for putting all this together, I’ve really enjoyed reading the blog and the discourse in the comments as well. I’ve learned quite a bit following along over the last 6 months or so.

        As a day trader I’m curious, if there were to be a surprise cut how do you think that news is likely to be delivered? An unscheduled press conference? Maybe it starts to get priced in on rumors of an unscheduled fed meeting? How has it played out in the past?

      • Michael Temple Says:

        Jerome…..What’s the frequency?

        An ode to Dan Rather!!

      • yraharris Says:

        Joe M–it will be hard to say but I think the SPOOS will rally but the big question will be where they close —the algo headline readers will certainly push it higher on FED RATE CUT—but when the dust clears will be far more important.See tonights Blog

  13. Chicken Says:

    So as rates tumble and invert, gold becomes more attractive as an alternative to bonds, correct?

    • yraharris Says:

      Chicken–the GOLD has been in play as the credibility of the central banks is being questioned—this has been my opinion for quite awhile but as you watch a rush into sovereign debt and precious metals it is painful to watch it play out in real time—the Gold/inflation nexus seems to have been broken for the moment which is a step forward.

Leave a Reply

%d bloggers like this: