Notes From Underground: “It’s Good News Week”

What an appropriate song for the band Hedgehoppers Anonymous. This week is loaded with potential market-moving outcomes. On Wednesday we have the final FOMC statement of the year followed by Chairman Jerome Powell’s press conference. The CONSENSUS is for no change in the current fed funds target range of 1.5% to 1.75%. The real key will hopefully be Powell’s press conference as market participants are hoping for any sort of dialogue about the Fed’s role in the repo market.

There was a note from Credit Suisse analyst — and former New York Fed and Treasury officlal — Zoltan Pozsar about the possibility of the central bank introducing QE4 by the end of the year. When Zoltan speaks, the markets pay attention so his concerns about the lack of reserves in the system should hopefully result in some reporter asking Powell about the need for QE that includes coupon purchases.

This issue will be more important than the FED‘s concerns about TRADE TARIFFS. By releasing his research note at the beginning of the week, I think it was Zoltan’s intention to make it an issue at the FOMC meeting. If the FED reveals it has heightened concerns about funding issues in the REPO market then it will PROBABLY lead to softness in the DOLLAR.

Be patient as press conferences have proven to provide opportunities as there has been several volatile swings across asset classes when the algos react to KEY WORDS that are meant  to create volatility.

The Swiss National Bank and European Central Bank both announce  interest rate policy Thursday morning. The SNB will not move off its current level of -0.75% as it waits to see if ECB President Christine Lagarde’s policies can create a bid for the EURO. SNB President Thomas Jordan will be very cautious to make any changes in policy  for his reaction function will be to look closely at Frankfurt.

Lagarde’s press conference at 7:30 CST will be an introduction to the NUANCES of the new ECB president. I expect that Lagarde won’t want to rock the financial boat heading into an uncertain year-end trade. But Lagarde will certainly maintain the need for a massive GREEN infrastructure program. The ECB will keep pressure on Brussels and the individual EU states to spend lavishly on infrastructure projects.

I would ask Lagarde the following: Would the ECB roll back the negative interest rates if EU governments agreed to a significant fiscal stimulus? The Germans, Dutch and Austrians’ financial infrastructure systemis struggling under the former president Mario Draghi’s NIRP regime, which has led to German banks beginning to charge large clients negative interest rates. Lagarde is a competent politician being very adept at the art of compromise. Throw in a EURO infrastructure bond backed the “good name” of the Brussels government and 2+2=5.

This is the easy part. Now what to do about all those players locked into EURO based carry trades. Short volatility at your own risk.

The central bank decisions will dissipate quickly as the U.K. election results become the focus. Before the latest poll results on Tuesday evening, the Conservatives were projected to hold a majority of 68 seats. That has allegedly shrunk to 28 but some are attributing it to FAKE NEWS out of Pravda. If Corbyn were to win it would unleash a torrent of risk off around the world as a far left government was deemed to be an unelectable entity.

The recent strength in the POUND reflects that early polls are correct but if recent polling predictions are any indication I will remain cautious rather then be in risk mode. The risk is much greater to the downside for British assets as the good news has been priced to a positive outcome. Corbyn will be an absolute disaster but if the Scots play the nationalism card the outcome is far from certain. Again, there’s far more risk than the volatility markets are anticipating. And, let’s not forget the articles of impeachment in the U.S. Yes, U.S. equities remain at all-time highs in the wake of unlimited, low priced liquidity.

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28 Responses to “Notes From Underground: “It’s Good News Week””

  1. David Richards Says:

    Here’s a piece from yesterday that includes within it a link to Pozar’s note in its entirety (Countdown to QE4) and his scathing assessment of the grossly incompetent fools at the Fed who, among other things, were played by top US bank execs to the tune of hundreds of millions in personal gains.

    So QE4, because it worked so well last time, at least for the banksters and reckless borrowers. But of course, QE4 was inevitable, given how the US gov’t is such an over-indebted and reckless borrower, getting worse even during the peak of the business cycle.

    As “shocked” posted yesterday, the Fed fools have launched a financial doomsday machine which cannot be exited without economic pain, IMO likely to be harsh and worse the longer this charade continues.

  2. Michael Temple Says:


    Fwiw…..I think the Doomsday Repo Scenario will not materialize.

    As you pointed out, I think the author has decided to write a provocative piece precisely to “shock” the Fed and Jerome into doing
    even more of the NOT QE to solve what ails the broken Repo market.

    If QE4 does, in fact, take place, I firmly believe markets will rue getting what they asked for. With VOL having been unnaturally suppressed this year by the CBs, 2020 is apt to be the year that they
    are all made to look like the Sorcerer’s Apprentice.

    The Sorcerer, sadly, passed last week when Mr Volcker lost his final


    • yraharris Says:

      Mike–but as the comments to Notes From Underground reflect there are many apprentices in the realm of Notes From Underground–and these are high quality apprentices who seem to comprehend the Sorcerer inn his full metal jacket—-and that metal was gold which Paul V claimed was his enemy as a central banker –Bernanke claimed he understood bitcoin but not GOLD—Hey Ben go learn from the PBOC

      • Michael Temple Says:

        Correct….Volcker (and even Kissinger) understood that gold was the enemy and he slayed the dragon. Does anybody remember Volcker’s Saturday Night Massacre when he raised rates 150 BP on a SATURDAY!!.

        Now, we may be coming full circle with Fed governors now musing that they should allow inflation to run a “little” hot, in excess of 2%, because it will simply balance out against the long times in which it has recently been BELOW 2%.


        With the EVERYTHING BUBBLE pumping up EVERY asset class globally, why do so many “smartest guys in the room” not ask why
        the dog isn’t barking?

        To wit, with all the RISK ON sentiment, why are CBs completing a 2nd consecutive year of RECORD bullion purchases.

        I would posit that while gold continues to flatline (silver, nearly comatose), it has never been much cheaper in comparison to everything going on in the world right now


      • David Richards Says:

        Given the track record of western CB’s and their purchases & sales of gold, I’m a bit concerned about their gold binge buying. PBOC knows what it’s doing in the gold market as it’s chock full of experienced traders, whereas western CB’s are chock full of academic economists.

        I think inflation usually favors energy over most things incl gold historically. Time just named Greta as Time’s man of the year. If that’s not a buy signal for old-skule energy companies (fossil fuels), then I dunno what is. That and the Inflation Is Dead on the cover of the Economist around when inflation bottomed. Expecting inflation and energy stocks to both rise significantly next decade.

      • Michael Temple Says:

        I am not so sure it is Western CBs buying.

      • David Richards Says:

        Hmm, ok good point then. Something to look into. I often hear some of the usual suspects continue to buy (Russia, India, China), and I just assumed the buying had broadened to include a number of European CB’s and/or any others too, given all the hoopla. But if the BOE ever buys gold again, then it’s probably a sell, and vice-versa, lol.

  3. yraharris Says:

    Mike–it was a 2% raise in rates and the Friday before IBM just happened to sell 1 billion in bonds—-underwriters were crushed as they had huge inventory –or so I heard in real time

  4. David Richards Says:

    I remember that IBM timing. IBM was good at picking rates, better than at making products. Decades later, little has changed as today IBM relies on financial engineering to muddle through.

    Didn’t PV raise it both 150 bp and 200 bp on different occasions?

    Yesterday, I saw a piece about PV on ZH about the history surrounding Nixon’s closing of the gold window in ’71. Volcker was there as a staffer and he later recalled that the closing of the gold window was intended by all to have been temporary, during which time gold was to be repriced higher, so then they could re-open the gold window at a realistic price and return to a gold standard. Instead, they lost all discipline, inflation soared, and the dollar has lost 98% of its value or whatever since then. Today’s Fed is apparently intent on wiping out that final 2%, The 1970’s could come back with a vengeance: high inflation, US economic malaise, stagflation, bonds crushed, weak US stocks, soaring energy gold & commodity prices, a rise of Russia and its military might, a boom in commodity-producing nations, wide-collared polyester suits and lotsa disco albeit hip-hop.

    • yraharris Says:

      David Richards–Paul Volcker thought gold was his enemy as a central banker—hey Pebbles if you read this write a reply about the question you asked Paul Mr.Volcker at the CME Naples conference—it will shine some more light here

      • David Richards Says:

        Yeah, Mike also mentioned that in passing above. Is that like, if gold is rising or high, then we at the Fed aren’t doing our job well.

  5. ShockedToFindGambling Says:

    Yra…..was just listening to you on WhiteWave

    Are you saying that the the Central Banks are using currency swap lines, to backdoor ECB and Japan QE, into the U.S.?

    • yraharris Says:

      Shocked –no not a back door QE just a prophylactic against a potential dolar shortgae which is hard to believe but with all the funding in the global financial system year end has interests

  6. David Richards Says:

    How did y’all like the Fed’s promise to keep its rate frozen at 1.5% with a symmetric 2% objective for inflation, thus *targeting* a NEGATIVE real interest rate indefinitely. What happened to the objective of “stable prices”? That, along with being the lender of last resort to member banks, is the primary raison d’etre for a CB.

    US CPI is officially 2.1% year-over-year. CPI rose 0.3% and 0.4% the last two months, equivalent to 4.2% annualized inflation. Thus, inflation already exceeds the Fed’s target and it’s accelerating higher. So why is the Fed announcing its intent to lock in negative real rates (that are becoming more negative)?

    I think the answer is clear. The Fed feels it must be a willing accomplice in aggressively monetizing the huge US debt, or at least control the gov’t cost to service that huge & growing debt. The Fed feels forced to fund the out-of-control spendthrift US gov’t, currently among the world’s worst in terms of its budget deficit both in absolute and relative terms. The alternative would be an immediate economic depression in the US, so instead the Fed is choosing the well-trodden path of higher inflation and a weaker currency. US seems destined to ultimately go full Weimar, because it cannot exit that road to perdition now without huge economic pain, no more than the US can exit its nearly-endless QE as was seen. The Fed’s balance sheet is currently growing faster than ever before. Stay SHORT USD.

  7. David Richards Says:

    I’m no Euro bull, except relative to USD, but for the Eurosceptics, although Europe has a structural problem, it’s theoretically solvable via creating a common debt, but the US structural problem of its towering twin deficits cannot be practically solved without suffering substantial economic pain.

    US has a very high budget deficit ratio and has already fired its fiscal shot via the “tax cuts” that mostly went to executive compensation & corp stock buybacks, creating US market outperformance in recent years until now.

    But now Europe has relatively more room for fiscal stimulus, and I doubt Europe will go with tax cuts that benefit executive comp & stock buybacks. Let’s watch EU policymakers to see.

    However, IMHO, select EM is the better prospect because that’s where interest rates are still comparatively very high, demographics are infinitely better, growth is stronger, deficits are smaller, so they’ve got higher demand potential and more room for both monetary & fiscal stimulus.

    • yraharris Says:

      Dave Richards–thanks for hoisting the relative value flag—-people want to think in absolutes but not for me unless all the key ingredients line up—Lagarde was actually quite clear and concise—sorry Mario I don’t miss you for a minute but there is sure to be a big job somewhere for what’s in a name that can fail up and big—

      • David Richards Says:

        Yeah well US markets have had a fantastic run for eleven years. It was best to simply be 100% US for that long period, kinda like in the 1990’s. Of course, eventually in such a case, values become comparatively overstretched, even to an extreme, as everyone winds up on the same side of the boat, so then the worm must turn. Then sometimes it turns fast, like we’re seeing in the dollar so far this month.

  8. Michael Temple Says:

    Good Morning

    I disagree with your view that the Fed is now aggressively trying to monetize the huge and growing US debt.

    Rather, I think Jerome is reacting to the gummed up Repo plumbing, as that is the immediate problem we face.

    Your larger worldview that the Fed will soon be monetizing the debt is something that is likely to be a feature of 2021 and beyond when the combination of percolating inflation (with which I wholeheartedly agree with you…after all, Fed has announced it will NOT tighten at the first sight of an inflation uptick as that will only be offsetting all these years of sub 2% inflation).

    So, inflation is baked into the cake and will rise from its current 2.1%ish to 3+% EASILY, in my view. Once the world grasps that
    new gestalt, negative yielding bonds globally are hellaciously vulnerable to crash conditions.

    Moreover, any recession in the US will blow out our deficit to something approaching $2 Trillion.

    It is at that time that the Fed will be enlisted to monetize the debt by
    going ALL IN on QE Infinity.

    For now, Jerome et al are addressing the Repo problem, and not the future debt wall that we inevitably face.

    In the meantime, DXY continues to soften while many gold stocks
    are at or near their 52-week highs, despite gold still meandering $80ish below its September peak.

    With so many mining M&A deals to go along with strengthening equity prices, I think it is simply a matter of when, not if, gold begins
    a spirited run up in 2020.

    Powell all but promised real QE yesterday with his announcement that Fed may buy 2 yr USTs. Well, having crossed that Rubicon, there is really nothing to prevent Fed from going farther out on the curve.

    Weaker USD reaction yesterday (with follow through this morning) seems to corroborate this view.

    Again, DXY is back to July trading levels, and yet gold is still $80ish
    below its September peak…..As DXY chart looks decidedly bearish, I think gold is poised to break out soon, although it probably only gets into gear after some type of mini RISK OFF event to awaken market players that something is afoot.



    PS Imagine if BoJo does not win it all tonight, or if Trump decides to slap tariffs on China in 3 short days, or if Lil Kim decides to lob a few
    projectiles over Japan.

    • David Richards Says:

      Good evening Mike. I agree the Fed is buying bills in reaction to repo too.

      So I’d say he’s killing two (or three) birds with one stone – including, as I’ve said before, funding the US gov’t or, equivalently, monetizing their short-term debt (issued to fund the gov’t and bought/monetized by the Fed). AFAIK there’s little attempt anymore to even try to sterilize it much now.

      That’s why the Fed has been began by buying *short* dated T bills; as this is being issued to fund gov’t and also by repo. It also serves as window dressing to help un-invert the much-ballyhooed inverted yield curve.

      The situation was exacerbated when the US debt ceiling was removed and thus the issuance of bills surged. Imagine what market-driven, short-term interest rates would be if the Fed wasn’t buying these bills. Especially as foreigners are now net sellers rather than buyers. Exacerbated also by gold taking share from USTs as an energy settlement asset (whether voluntarily or as a workaround by some against some US sanctions).

      As for USD, the gov’t keeps increasing its deficit (in the bipartisan belief now that deficits don’t matter) and issuing mostly short-dated T-bills to fund itself, with the Fed having no choice but to keep monetizing that in order to control interest rates. Just a matter of time until USD eventually reacts badly to this, IMHO.

      Actually I’m in Singapore, no actually at my retirement pad on the beach of a little tropical island near Singapore – where it’s currently almost midnite. So I need my Zzzzz’s now, especially as I’m an old man now, who’d rather enjoy my final decade of life not dealing with the coming shit-show these fools have created (I’ll be fine but I worry about my loved ones who’ll survive me and are ignorant about financial affairs). I lived & worked the 1970’s and I thought Powell might have too, so he should know better about “running hot” with inflation. Does Powell wish to become another Arthur Burns or worse? We miss Paul Volcker already.

    • David Richards Says:

      Since after you wrote that, it looks like Trump will concede on tariffs rather than add them. Funny how that happened just hours after Powell’s dog-n-pony show in which he capped rates until 2021. Trump played him like a wheeler dealer. Powell and the Fed have no clue or credibility except maybe as clowns for a circus.

  9. Michael Temple Says:


    With a nod to Mick Jagger

    “Here It Comes, Here It Comes…..”

    Thank you, Christine

  10. Michael Temple Says:

    Good Morning
    As the dust settles, RISK ON, baby

    BoJo crushed it.

    Trump signed the most “perfect” Phase One Trade Deal in history.

    Fed to the rescue with $500 BN in Repo….No Armageddon on Jerome’s watch. Who cares if this “temporary” year end fix doesn’t get undone in the new year. NOT QE….Sure, Jerome, whatever you say.

    And, best of all, USD is getting torched this morning with DXY down 65 bp.

    De facto easing!!

    Gold, of course, got carpet bombed by the non-carbon based “life” forms as algos equated China Deal with Risk On and Gold Off.

    Yet, if they truly focused on the deeper meaning of the Fed’s EXTRAORDINARY Repo operation, they should have seen the implications it would have for a weaker dollar.

    Ergo, why the rush to sell 10MM ounces of gold on Comex. 10MM!!!
    That is a crazy amount of paper gold to sell, especially now that the USD is weakening.

    Gold thought it was about to kick that football before Lucy yanked the ball away. Yet, gold stocks took it all in stride with several stocks
    still making new 52 week highs (Yay, NEM).

    As 2020 soon begins, the weak USD meme should continue. Stocks probably continue to climb because……well, just because.

    But, the coin of the realm is finally getting clipped and if Lagarde is right that inflation is a comin’, we know that Jerome et al have staked out the position that there is nothing wrong with letting inflation run a little “hot” at north of 2%.

    So, with Fed on hold on rates, but quietly doing QE4, and a budding
    rise in inflation, I think the seeds are sown for some big time
    bond carnage next year. Strangely enough, stocks will ignore the bond market troubles for a while, before it won’t.

    Gold may not be a trading sardine just yet. But, its value is growing daily as the USD is now in an unmistakeable downturn.

    • David Richards Says:

      Dust off the 1970s playbook. Those “bonds” were called Certificates of Confiscation. Now, like then, real interest rates are firmly negative and staying negative, with the Fed now enforcing a rates cap on the short-end (as it must do to help finance the spendthrift US govt that mostly relies on short-dated bills to “pay” its way) and Powell hinting they’ll buy longer bonds too “if necessary”. USD will take the pressure by tumbling. I’ve been waiting for months as it’s been mathematically inevitable. A realistic target for DXY is 80. Technically, EURUSD held exactly where it had to at 1.08, and now its next stop is 1.18+. Much more bearish potential for USD exists.

      Sadly, retail investors are largely piled into Certificates of Confiscation, denominated in the weakest major currency today. Retail is taking a haircut which is just beginning.

      For an analogy from history, look at bonds in the post WW2 period, when US capped rates as it’s begun doing now, or the 1970’s when inflation was rising as it will in 2020+.

      While Trump is focused on juicing stocks, he fails to realize that Joe Average is mostly in bonds. So trump might be backing the wrong horse by sacrificing the value of bonds and USD. Come election day, Joe Average might be pissed at how much his purchasing power and life savings in bond funds is falling. He mightn’t be able to explain, but he’ll know he’s falling behind and he’s mad about it. Plus he’ll be pissed at the ravaging inflation of his healthcare premiums, especially with gov’t saying inflation is only 2% and we need more inflation. THESE are the issues that the Dems can/must seize on to punt Trump from office; not the impeachment witch hunt which will backfire just as it did in 1998 after the GOP impeached Clinton.

      • Michael Temple Says:

        Speaking of health care premiums, mine went up a NOT so subtle
        30+% for 2020.


        My 2020 outlook (which is worth 2 cts–at most)

        1. Duration bonds begin to falter with US yield curve relentlessly
        widening out…..European yields begin to flirt with ZERO as things improve and fiscal spending becomes the order of the day.

        2. Stocks continue to party because all is well.
        Fed has “your” back as there is no amount of Repo operations they
        will NOT undertake to keep the sh*&t flowing.

        So, with rates on hold and Fed shifting to a likely formal QE (seriously, how can Fed go to the next level of a $1 Trillion Repo Operation if the January boost does not do the trick?) expect stocks
        to continue to roll….until they don’t

        3. With the confirmed roll over in USD (which Trump and even Jerome desire) gold should finally have a rip roaring time in 2020.

        Final thought.

        The DRUBBING of Labor/Corbyn should be a YUGE WAKE UP call for the “Woke” Wing of the Socialist Democratic party here in US.

        Just as the Brexit Vote in 2016 ushered in Trump, it is hard to ignore
        that the UK utterly monkey hammered Corbyn out of political existence as some Labour Districts, which had been solidly in the Labour column for a CENTURY, abandoned them.

        So, I wonder if the Dems will begin to realize that the Socialist Agenda of Sanders and Eliz Warren is decidedly NOT what America wants, even Democratic America.

        I still think Trump is on thin ice to win it again, just based on electoral map. But, if the Dems put up a Socialist Agenda at their convention, along with a Hard Left candidate, Trump might yet win.

        Again, the British election results were STUNNINGLY HUGE in their
        rejection of Labour. To boot, sterling is at its highest level since Brexit.

    • David Richards Says:

      Yep FWIW (not much) I entirely agree with your analysis of the UK and US politics. It’s more interesting than Singapore which is a uni-party system, basically a totalitarian “state capitalist” country that Deng Xiaoping began to copy, in which you enjoy unrivalled economic freedom but your state political views should be kept to yourself and protests are unlawful, altho it works for them and me (no taxes except 7% sales tax, virtually no crime or poverty, no welfare, and most importantly, no tolerance for corruption and no snow or ice LOL).

      Agree that rates among developed CB’s should start to converge. Our pick for next year and beyond is traditional energy (fossil fuels) companies – both production and servicing – that are as hated now as gold miners were hated 1.5 years ago and European banks 2 years before that. We think the energy sector is a better story than the gold mining sector in terms of its valuation, sentiment, need and technicals. Politics maybe too.

      The potential fly in the ointment is that global inflation could well reverse before it gets much off the ground, but we think this will hurt other commodity producers more. Ominously, the Chinese credit impulse is already turning. Further, subdued M1 growth suggests that new credit is being used to repay old credit rather than on stimulus. Not supportive of global reflation.

      So nobody talks about this, but CB’s in China and parts of Asia especially ex-Developed Asia are NOT easing and inflating like DM CB’s. Why? Because they already have inflation in the 3.4 – 5% range (as does the US except it’s not reported correctly imho). Plus another reason….

      China is the only major CB not participating in a global reflation effort. Some might say, oh they want a worse global economy so Trump loses next year. Maybe. But more likely (credit Louis Gave of Evergreen Gavekal in HK), the Chinese leadership with its Marxist upbringing understand that inflation is the seed of revolution. The CCP is more concerned about fighting inflation, especially food inflation, than anything else, as a matter of its own survival.

  11. yraharris Says:

    David—are you really Stanley Druck??

  12. A.S. Says:

    This is what I raised to Anthony (C.) I’ve never heard, come across (CB) speeches being released ‘in real-time’ for algos to comb through them ..already not televised tho I hear it is possible to view them I just haven’t come across any way how; and certainly we can comb through the releases, after the fact ..

    IMF being in bed w/ rating agencies..hey Christine ..

    The all-time highs have got nothing to do w/ liquidity -17 on ..

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