Notes From Underground: Time It Was, What a Time It Was

These Simon and Garfunkel lyrics could apply to the events of this past weekend, the bookends of Jackson Hole and the G-7 meeting. The meaning was best summed up i a Financial Times story that quoted St. Louis Fed President James Bullard, who said, “Something is going on ,and that’s causing I think a total rethink of central banking  and all our cherished notions about what we think we’re doing. We just have to stop thinking that next year things are going to be normal.”

Many analysts picked up on this and Deutsche Bank strategist Alan Ruskin used it as the basis of a 20-point exegesis of central bank policy. This critique of central bank policy has been a theme of NOTES FROM UNDERGROUND for many years. As I said, IT AIN’T ROCKET SCIENCE. What I means that while NASA could send a spacecraft to the MOON with a HIGH PROBABILITY of predicting its return point. The central banks utilizing high maths have had no such sense of how this QE experiment would end. In a sense, NO EXIT PATH WAS GUARANTEED.

Yet Bullard’s critics fail to raise the most significant issue of all. How will the failure to plan a reliable exit effect the investors that have loaded up on sovereign debt yielding less then zero. The FALSE CERTAINTY promulgated by the world’s central bankers and the simpatico journalists seeking ACCESS have left the world in a fragile state with massive amounts of mispriced debt.

Again, who have been the largest consumers of the central bank efforts to PORTFOLIO BALANCE the world’s riskiest assets? That the world’s pension funds have been force-fed the instruments of central banks’ best academic theories. So if we follow Bullard’s line of reasoning there is going to be massive losses somewhere in the financial universe. Bond owners will be praying for a deflationary spiral similar to what Japan has undergone.

***The Biarritz G-7 meeting has ended and the media has declared it a great success for not exploding into acrimony as did last years meeting hosted by PM Trudeau  in Canada.It was a love fest between President Trump and French President Macron.The Macron/trump press conference had Donald lathering praise on the efforts of Emmanuel Macron.

The meeting ended with no formal communique but all the leaders praised each other for bringing the Iranian issue closer to a non-violent end and preventing President Trump from placing TARIFFS on European exports to the U.S. I OFFER THIS WARNING TO PRESIDENT MACRON: Trump’s effusive rhetoric has proven very short-lived and can result in very harsh policy responses.

Watch closely for the U.S. president to turn on the Europeans as the heat gets turned down in regards to China. The efforts of the ECB to suppress the EURO by engaging in even lower rates coupled with newly enhanced liquidity program will force President Trump to sustain pressure on the Powell Fed. Monsieur Macron, enjoy the moment. September is coming bringing a change of seasons and the Presidential  temperament.

Also, it was interesting that German Chancellor Angela Merkel was left in the shadows of G-7 meeting. Merkel has gone from the mainstay of the democratic liberal order to an afterthought.

More importantly, the weekend has an FT article titled, “Bundesbak’s Weidmann Opposes New Stimulus.” Last week there were many stories that raised the possibility of a German fiscal stimulus program, which the media maintained was Bundesbank-supported. I had cautioned that we can’t make a determination because we had yet to hear from President Jens Weidmann.

Well, now we have as Weidmann said it’s not time to “panic” about the German economy. The Bundesbank leader also positioned himself against a sizeable resumption of ECB bond-buying. Weidmann said he was “particularly cautious” about government bond purchases because they could blur the line between monetary and fiscal policy. Enjoy the G-7 meeting honeymoon while it lasts. I’m glad WE HAVE A PHOTOGRAPH.

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8 Responses to “Notes From Underground: Time It Was, What a Time It Was”

  1. Michael Temple Says:

    Yra
    Great article.

    Four words.

    Buy gold. Buy silver.

    Simple as that as the economic world gets turned upside down. QE is coming and don’t rule out a Powell demotion after Dudley attacked Trump directly.

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

    You’re a past master of the sardonic… and yes, glad we have the picture.
    Trump changeable? Go figure!
    Germans still parsimonious? Who woulda thought?
    Yet don’t forget that NASA was concerned over whether the Apollo 11 lunar lander was going to achieve ignition for the trip back to the command module… otherwise Armstrong and Aldrin would have been stranded on the moon.
    That said, it was probably a better bet they were going to get them home safely with now seemingly antiquated technology (any modern cell phone has more computing power) than the central bankers knowing what to do about Brobdingnagian balance sheets.
    Gold is on a 1,490 UP Break out of its 8-year down channel. That’s going to make things very interesting on any reaction to test the ‘big penny’ area. Of course, with Gold it’s always a question of how far it goes on psychology before any economic weakness defuses the rally.
    Is that going to happen this time, or does the ostensibly welcome inflation ramp up just when the central banks have little latitude to deal with it through higher rates due to much weaker economies… Son of Stagflation???
    Where’s G. William Miller when we need him? (Remember all those Sinclair Global mid-morning hoots, “It’s Miller time”?) We shall see.

  3. asherz Says:

    Most of the world do not understand President Trump’s tactics. China=enemy. Days later-Xi=Great guy. Answer- “That’s how I negotiate”. Do what I want? Reward. Oppose me? Back of my hand.

    Yra- The Germans will speak as they do until the temperature rises. Then they will get out of the kitchen. Like our friend Powell last December.
    China? The heat will really not get turned down. Xi and Trump are going through a dance but each has the same separate goal- global superiority. So possibly Xi may make concessions if he is forced to and later renege on them. It’s a big game going on. Trump deal with Japan not much spoken about is important. He has to line up more allies in the Battle of the Titans. Get USMCA passed, get a deal with Johnson after Brexit, and then a deal with EU…or else.
    Sovereign debts will never get repaid. Massive restructurings lies in the future.

    Rohr- You don’t need inflation for gold to go up. It will also go up in DEFLATION when fiat currencies go the way of Germany 1923 and Argentina for the fifth time today.

    That’s what it looks to me from this perch.

    • rohrintl Says:

      Point well taken asherz…
      …even into the early 1930’s Great Depression the inflation-adjusted Gold price rose markedly.
      And if we need any further consideration of autocracy leading down unconstructive paths, just look at what Johnson is proposing in the UK and China now expanding the ‘social credit’ system to include foreign companies. None of this can end well.
      Thanks for the reminder.

  4. ShockedToFindGambling Says:

    Good article…..you said:

    Bond owners will be praying for a deflationary spiral similar to what Japan has undergone.

    I disagree with this…..a deflationary spiral will hurt the creditworthiness of all bonds….even Treasuries.

    People say the FED can print all the money we need……but at some point it becomes devalued or close to worthless.

    • yraharris Says:

      Shocked –we can agree to disagree but there are plenty of portfolio managers are predicting a severe slowdown coupled with a depreciating YUAN resulting in China exporting price deflation.The harm to the creditworthiness of so many entities will be felt later but that will be a fear for later—-think of the Petrodollars that caused so much pain but took years to play out—this will be an investors devastating period because debt is the key variable regardless of the price of bonds.Like in Japan deflation is the only way to put some value into the bonds of the world’s reserve currency—wonder what Bill Dudley has to say about that?

      • ShockedToFindGambling Says:

        Yra- respectfully disagree on your timing.

        This bubble is several times the magnitude of 2008……yes we don’t have overpriced CDOs, but negative yielding Sovereign debt is much more pervasive and dangerous.

        I think that once it becomes apparent that the U.S. economy is sliding into recession, long dated Treasuries will have one final blow off rally, and then soon start breaking on credit concerns.

        Just my opinion.

  5. Don H Says:

    /GC Still Bullish above 1526, target 1570; IF Buyers fail to defend 1526 before that target trades, then anticipate a deeper pullback.
    /ZB Bullish above 164’20, target 168’20; IF 164’20 breaks before that target trades, then anticipate deeper pullback.
    /ES Bullish above 2844, target 2902; IF 2844 breaks before trading up, then anticipate a deeper pullback.
    My .02

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