Notes From Underground: Another Fine Mess You Got Us Into, Olli Rehn

The Federal Reserve just won’t admit that President Trump and the European Central Bank are holding its policy designs captive. Trump ramps up talk of tariffs in an effort to keep the financial markets uncertain while the ECB wishes to pursue an ever expanding balance sheet in an effort to reach an ambivalent inflation target. There is no doubt that REAL YIELDS throughout the European Union are NEGATIVE. Even the Italian 10-year is trading around 1.35%, which is below the inflation level however dubious it is calculated.

Ponder that Spain and Portugal’s 10-YEAR yields below 10 basis points, a real indication of NEGATIVE REAL YIELDS. But the ECB seems intent on powering on to pursue QE, if not QQE. On Thursday, ECB policy maker Olli Rehn said in a Wall Street Journal interview the ECB OUGHT to provide an “impactful and significant” stimulus package. Rehn put forth the possibility of purchasing equities in a nod to Governor Kuroda’s BOJ policy of purchasing equities and other assets.

The question remains: To what purpose is Rehn ramping up expectations for more stimulus when the current negative interest rates have wreaked havoc on European banks and financial institutions. The immediate effects of the Rehn interview was to put downward pressure on the EURO currency while sending BUNDS and U.S. Treasury yields lower. The REHN interview was similar in outcome to President Draghi’s speech at Sintra, Portugal the day before the June FOMC meeting. Chairman Powell needs to confront the White House and the ECB by cutting rates aggressively, which removes the FED from the discussion of even lower interest rates.

This would not do one thing to stimulate U.S. growth but none of the monetary stimulus is meant for growth. It is all a tour de force of academic arrogance. James Grant has been citing the PhD standard as the basis of central banking, an apt description about which NOTES FROM UNDERGROUND agrees. The present outcome of HIGHER BONDS, HIGHER STOCKS, HIGHER PRECIOUS METALS, is the culmination of central banks quoting “EVERMORE.”

The GOLD rally defies conventional wisdom as BONDS cannot be rallying if inflation expectations were increasing. Something will eventually have to give. But for all those maintaining that GOLD is solely a hedge against inflation I would advise recalibrating your models to be directed at central bank credibility. The Rehn interview has again trapped Jerome Powell heading into Jackson Hole on Friday. Another fine mess, indeed.

***On Friday (just after the equity markets closed), the U.S. Treasury released a statement saying that it plans to do “market outreach” again on ultra-long bonds (50 or 100 years). This is an attempt by the Treasury to take advantage of the ridiculous low bond yields and move to extend its offerings to 50 years or more. When it previously entertained the idea in 2017, market participants rejected it because Treasury wouldn’t be able to issue in a “regular and predictable” manner.

In response to the news, the 5/30 curve to jumped 4 basis points to 62.5- basis points, closing above the 200-day moving on the week. While we have all been concerned about the flattening of curves, Friday’s late action needs to be considered. It seems that the U.S. Treasury is trying to become involved in the yield curve discussion.

Extending duration would be a NEW TWIST in the discussion. And what a time to deliver some market outreach on late Friday. Watch the the BONDS for market confirmation.

Then on Sunday, Trump’s economic advisers were feeding the talk shows with forecasts about economic growth heading into the 2020 presidential election. Larry Kudlow maintained that there’s no recession coming and yet he continues to put pressure on Chairman Powell for a rate cut, as did Peter Navarro. If the economy is doing so well why cut interest rates, which leads to pressure on banks, insurance companies and pensions. Unless … the White House wants downward pressure on the DOLLAR. Hmm, currency manipulation?

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15 Responses to “Notes From Underground: Another Fine Mess You Got Us Into, Olli Rehn”


    Yra, your discussion re the long end, and the steepening are you expecting the steepening via short end rally or long end selling off … or combination of both ? thanks, AP

  2. Asherz Says:

    Yra- Is there any doubt that over the next two years “Whatever it takes” will become the watchword for all central banks, including our own? As the cognoscenti head out to Rabbit Hole, Wyoming where the buffalo roam, Jay Powell must be having the following thoughts.
    “If I don’t give them a 50 basis cut, they’ll blow my brains out. If I do give them the 50, they will be asking, if the economy is so good, why this panic step?” Can’t win .
    The 10 year Swiss is at -1.08. Storage fees are getting expensive. China is in much worse shape than they are letting on as they keep their dark tinted sunglasses on in the Trump poker game. The Argentina 100 year dropped 35%. (Who were the geniuses who bought that paper?) So the US treasury let’s it be known that they may enter this market before the window closes.
    And the PPT has cancelled all shore leaves. Potter and Dzina jumped ship just in time.
    While the Chinese curse about “Interesting Times” is rapidly approaching.

  3. Trader1 Says:


    At what point do all these zero and neg. int rates totally destroy Insurance Cos.??? Many Ins. Cos. have a two pronged problem with Life Ins. Policies not being underwritten properly + 0.0% int. rates to match liabilities???

    Powell and Draghi should be asked at Pres Conference if they were CEO/CIO of Insurance Co. what they would do?

    And all for “tour de force of academic arrogance”…..

  4. kevinwaspi Says:

    A woman hears from her doctor that she has only half a year to live. The doctor advises her to marry an economist and to live in Jackson Hole. The woman asks, “will this cure my illness”? Answer of the doctor: “No, but the half year will seem like a lifetime”.

  5. Don H Says:

    /ZB Still Bullish above 162’14; however, Buyers need to regain bid above 165’20 for any attempt at new highs.
    /GC Has found Sellers which forces Buyers to attempt a hold above 1482 to halt this slide.
    /ES remains Bullish above 2907 for continuation; IF 2907 fails before trading higher, then anticipate deeper pullback.
    My .02

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

    The govvies are just proving again that they are the equities older, smarter brother.
    All of the strong US wage and retail spending strength are late cycle phenomena based on previous corporate capital investment. As that is now seriously fading, the labor market and consumer activity will weaken across time.
    Of course, Europe still has its own little special drivers for the Bund rally (Italian government about to fall again), and the UK has the looming Brexit shock.
    Yet at some point the lack of certainty thanks to Trump’s serial vacillations and the China tariffs weakening US capital investment will bite here as well.
    What Trump doesn’t get is that once this is in motion, no amount of accommodation from the Fed will timely restore strong growth. Look at the lack of effectiveness of the serial Fed QE programs until Trump tax cuts and lower regulation came along.
    Maybe he can deliver another tax cut to spur the economy into next year’s election… but we doubt the House will go along with any such effort, as they know it would assist his reelection bid.

  7. Michael Temple Says:

    Gold is insurance “so you can sleep at night “

    That gold is rising in tandem with bonds is huge, as you point out.

    Stocks seem to levitate because of a fervent belief that the Fed put will soon be activated, saving one and all. And, if Powell hints at QE, then off to the races for stocks.

    But, so too shall gold rally. Front end of curve seems headed for sub 1%, although long duration bets seem not worth the risk.

    Am surprised at how little focus MSM Wall Street analysts are paying to gold’s unusual behavior in light of historic bullish moves in USTs

  8. ShockedToFindGambling Says:

    Good article.

    I think the FED and the Administration are scaring the Hell out of the markets.

    They talk about how strong the Consumer and Employment are, yet they act like there’s a disaster right around the corner.

    Watch what I do, not what I say.,

    • yraharris Says:

      Shocked –absolutely spot on as why talk tax cuts when everything is at full bore—-the numbers coupled with the rhetoric is enough to have on believe that 2+2=5

      • ShockedToFindGambling Says:

        This looks like a once in an economic cycle chance to short SPOOs.

        Gold, Silver Bonds, Industrial Metals, Grains are all saying Recession or worse……HYG looks like a massive top on the monthly chart.

        The Federal deficit is out of control.

        If FED minutes or Powell are dovish, that may be the chance to get in with relatively low risk.

        Just my opinion…….I could be wrong.

  9. Chicken Says:

    200 year bonds @ -1% sounds like a plan to me. Others may not appreciate so much?

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

    This will still be more so about the lack of corporate capital investment, which has been the initial driver and impetus for any expansion extension at least since I’ve been watching in the 1970’s.
    And if US companies are getting defensive (, think about the mindset in the UK and Europe that have the Brexit black hole looming.
    Of note, the most recent NFIB Small Business Economic Trends ( highlights current strength, yet has an interesting insight on the impact of interest rates: Only 12% of small businesses would change their borrowing plans if there was a 100 basis point FOMC rate cut.
    So this another area where Trump seems misguided in his ideas on what will assist the US economy in the face of the US-China tariff war concerns. The future economic performance is likely to depend a lot more on perceptions of certainty than raw interest rate levels; which most businesses are rarely concerned about unless they reach significantly higher levels.

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

    See page 3 of the NFIB SBET for the interest rate incentives analysis.

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