Archive for September 24th, 2019

Notes From Underground: Beware the ECB’s New Weapons

September 24, 2019

As promised, here is the clip of me and Rick Santelli talking about myriad issues in the market, from the state of U.S. dollar funding to Europe’s issues.

This is a highly relevant discussion about the tasks confronting incoming ECB President Christine Lagarde. On Tuesday, Project Syndicate published a piece by Yanis  Varoufakis titled, “New Weapons for the ECB,” offering a plan that will result in  ECB CONVERSION BONDS. It is a surprisingly TAME essay as the firebrand of the EU is offering resolution to the problem that President Lagarde has been delegated to attempt to resolve. Varoufakis is resigned to the idea that there will no coordinated “sensible fiscal policy.”

The failure of politics necessitates the need for a EUROBOND is paramount to prevent the peripheral nations from embarking on deflationary policies in an effort to avoid insolvency. Varoufakis saw Greece subjected to the terror of INTERNAL DEVALUATION as wages dropped dramatically in an effort to make the country competitive with its fellow EU nations. Primary budget surpluses for a nation struggling to create an environment for GDP growth is a recipe for political instability. A eurobond/conversion ECB bond from its existing asset pool would eliminate the fear of insolvency and allow for a more coordinated fiscal response to an EU recession.

While Varoufakis is too complimentary of Mario Draghi, his piece lays out what it is that President Lagarde must overcome to be deemed a success in her new job. It seems that “agent provocateur is bidding for a position in the Lagarde regime. The coming Lagarde program will result in increased volatility in the EURO ZONE debt markets as politics takes on the opponents from Europe’s heartland who have been financially repressed by negative interest rates. He said, “Technically speaking, ECB conversion bonds are the obvious replacement for the failing quantitative easing program. Only the misplaced fear of debt mutualization stands in their way.”

***Tuesday evening at 9 p.m. CDT, the Reserve Bank of New Zealand (RBNZ) announces its newest interest rate decision. On August 7, we at NOTES FROM UNDERGROUND anticipated the 50 basis CUT because of the strength of the KIWI versus the Aussie dollar. The low made that night on the cross was 1.0361. Now, the cross is at 1.0752 after touching 1.0835 last week. The recent KIWI weakness OUGHT to keep the RBNZ‘s overnight cash rate on HOLD at 1%.

If the RBNZ were to actually cut rates citing global concerns it would involve an outright battle with the Aussies. They would be fighting a currency skirmish, which would force the AUSSIES to lower their rates at the next meeting — and likely generate some response from President Trump. Let’s hope the RBNZ is content with the recent weakness in the KIWI. Keep an eye on the 200-week moving average of 1.0708, which is a critical support level.

***In my analysis of the Middle East, I advise paying attention to the role of Vladimir Putin. His stature is enhanced every day as the tensions build throughout the region. It is Russia that has become the critical variable to any lessening of tensions. It is time to negotiate the SANCTIONS away for the loss of Crimea will remain an issue for the Europeans to resolve, as well as an overall lessening of violence in the Ukraine.

The sanctions have been an irritant to the Russians as Germany and others still rely on Russian energy imports. And the issue of Saudi Arabia continues to  be a “riddle wrapped in a mystery inside an enigma,” leaving me to wonder what all the actors have as their self-interest. Watch all things Russian for a clue.