Notes From Underground: The Market Has Much to Consider

Last week was filled with the culmination of many issues as we had the FEDECB, trade agreement, UK election, impeachment hearings, and even an attempt at resolving the USMCA trade deal with Mexico and Canada.

But in the short run, it appears as if the U.S. overnight funding market has been sedated. While some analysts have been warning about the underpricing of risk heading into the end of 2019, the Fed’s half a trillion liquidity injection for year end seems to have tamed the volatility to a level with which the central bank is comfortable (at least until December 31).
As we prepare for the next two weeks in a holiday deprived liquidity situation it will be important to understand the potential impacts for profitable trades emanating from all of these events. This week we’ll also get the decision from the Riksbank of Sweden into play as it has predetermined that is is TIME to end the NEGATIVE interest environment in Sweden as it does more harm than good.
This will not be an insignificant event as it has the potential the provide a frame work for ECB President Lagarde to have COVER for moving the ECB on a similar path. There is something in the air that hints that the ECB president will move off negative rates in a compromise with some EU states in an effort to achieve fiscal stimulus in some form. Maybe a green infrastructure build-out.
Today’s Financial Times has an article about Jens Weidmann titled, “Head of Bundesbank Warns Against ‘fetish’ of Balanced Federal Budget.” This is an extremely important turn of previously hardened Bundesbank positions. If there is some sense of political compromise it will be found in Europe being a destination for investment flows. Will Lagarde find a rationale for going back to ZERO and end the negative interest policy currently in place?
Will Germany be willing to negotiate away negative interest rates for fiscal stimulus? This is not a RHETORICAL QUESTION for it is in the arsenal of Christine Lagarde as she tries to move Europe to a genuine period of economic growth.
The Draghi policy was a triage that did harm to the EU financial system while bailing heavily indebted sovereign nations. Sweden is trying to show the way forward and the ECB president wants to follow.
In the story, Herr Weidmann noted that “Berlin was saving 55 billion a year on servicing its debt compared to what it would have paid if interest rates  had stayed at 2007 levels.”
This is a dovish Weidmann or more importantly one who is seeking some sort of reconciliation with ECB leadership. It also seems that Weidmann is acknowledging that the financial repression of the German savers has pushed the government into the role of consumer for it is the SOVEREIGN that has benefited the most and needs to act in a Keynesian manner. A tectonic/teutonic shift.
Now for the Riksbank to remove the NEGATIVE RATES and Europe will become a place of comfort for foreign investors.
In addition, EUROPE has more positive news as the Corbyn Labour party was TROUNCED in last week’s election. Boris Johnson has secured an absolute majority, an outcome that eluded the inept Theresa May. This is an important victory for it brings a sense of closure to the BREXIT referendum which has left Britain in an uncertain position in the EU and in the global financial system.
The Davos crowd was certain that BREXIT would devastate the U.K. but they have been wrong for three years. BOE Governor Mark Carney has so badly misdiagnosed the economic outcomes of Brexit he needs to leave fast, very fast. In a potential positive outcome, Kevin Warsh is rumored to being considered for the BOE job.
What Carney and his DAVOS cheerleaders failed to comprehend was that the British supply chains coupled  with a weak POUND would provide support to the British economy.
Even Blankfein and Dimon were proven wrong in their supporting the argument  for the demise of the U.K. economy. Britain has outperformed the EU for the last two years in terms of jobs and GDP growth. This was done without new QE or drastic interest cuts. The EU will find a way to placate BOJO in an effort to keep Britain as a solid customer and banker for the EU.
If Brussels would end the desire to PUNISH the U.K. for the its move to vacate the legal shackles of endless regulations both parties could benefit. French President Macron has softened his stance in an effort to keep Britain close and part of his plans for a European defense group. Boris Johnson is in the image of Maggie Thatcher. He is not for turning.
The FT and others have created the FALSE NARRATIVE of BOJO as Trump. This is wrong again as his overwhelming victory revealed. Johnson crushed Corbyn in traditional labor strongholds. In an effort to reward the areas of new support the prime minister is planning to initiate infrastructure projects to rebuild long neglected industrial areas.
This Johnson is a master politician. These programs of fiscal stimulus will provide further support to Lagarde and Brussels for enhanced fiscal stimulus on the continent.
***Quick take on the CHINESE trade deal: In simple terms it is the Electoral College Act of 2019 for there was NO WAY Trump could withstand losing the agrarian based vote and hold the White House, if the Democrats can rally to support a centrist candidate.
The UK election revealed that working class voters can elect a Conservative if the alternative is a radical leftist offering up nothing but rewarmed policies from a distant past.
The world of unencumbered capital flows has created hardships for the workers in developed economies but old tired plans of redistribution are not for implementing at this time. Two weeks ago President Trump lashed out at Brazil and Argentina for harming American farmers by devaluing their currencies making U.S. agricultural exports non-competitive.
Trump was wrong in his charge but as I wrote it reflected a sense that the President was worried that the tariffs were a failure and he feared losing many of the ag-producing states that put him in the White House. Whatever this Phase One Deal is  for we have no certainty it is meant to assuage the agricultural sector that President Trump is fighting for middle-America.
The problem remains that Lighthizer, Ross, Mnuchin and others have destroyed a great deal of GOODWILL as farmers have lost market share they have spent forty years developing. This year has seen a significant rise in Farm foreclosures so agricultural producers shouldn’t be in a hurry to BUY THOSE NEW GIANT TRACTORS.

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20 Responses to “Notes From Underground: The Market Has Much to Consider”

  1. Adam Says:

    Great post Yra. The more I read of you the more I start to understand, or so I think ha.

    In terms of the farm foreclosures is there any relation to farm subsidies that may have been removed? I have no idea either way but I’ve always heard of large farm subsidies that essentially keep some people in the farming business who likely wouldn’t be if the “free market” had its say w/o govt intervention.

    • yraharris Says:

      Adam—thanks for your voice.Ag policy across the developed world has been loaded with politics for many decades so it needs analysis in the classic political economic sense.

  2. asherz Says:

    Yra- $500 billion in Repo operations in the next month is again a major story getting inadequate coverage. Is the US monetizing its $Trillion plus new debt issuance? Is a major bank (DB?) or hedge fund in deep trouble? A Setember 17 short term liquidity problem has now extended into yearend and my guess is that it will continue. We need a good financial Sherlock on this case. The dog is not barking.

  3. Anne-Marie Baiynd (@AnneMarieTrades) Says:

    Thank you for the great post, Yra. I have a question for you related to this. Though volatility is somewhat fading, we see the increased rise in gold and on top of that as the repo window holds open, we see the dollar slipping. The notion that negative interest rates in the ECB take hold, I estimate that this gives the grain belt and the commodity sectors an added boost as the dollar fades further. Would this be reasonable to think? Where are the holes in my thoughts and if the repo window closes at year-end – what kinds of outside ‘shocks’ might we feel? Thank you again. I learn more every time I read you.

    • yraharris Says:

      Anne -Marie—-yes if the central banks are successful then commodities OUGHT to awake from their long slumber which is why Druck was discussing Aussie and Canadian dollars this morning.The FED is going to find out what shocks take place when REPO window is closed a bit.It is a point that Chris Whalen raised about Europe in a podt we recorded yesterday—the losses European bond purchasers will suffer if Lagarde were to go to ZERO

  4. Alex Arjomand Says:

    Carney did not misdiagnose the impact of Brexit. One of the BOE’s jobs is to ensure the stability of the financial system. What the bank was doing, therefore, was considering the ability of the system to withstand possible economic shocks due to Brexit. Their scenario for no-deal Brexit was plausible and he repeatedly provided assurance to the market, that the banking system was more than strong enough to withstand it. In other words, he was not predicting what was going to happen, he and his colleagues were doing what every good risk manager should have been doing.

    • yraharris Says:

      Alex –we will agree to disagree because I believe Carney was deeply sympathetic to the remain group and painted a dire outcome to scare Britain into being more compromising to the dictates of Barnier/Juncker—yes a central bank has to do what you maintain but in his speeches he went beyond that—in a similar fashion to President Obama telling Brits before the vote that they would go to the back of the queue—-sorry but the Davos crowd had much at steak in their minds on a Brexit with the Brits departing—Carney does not get a pass and he is no Mervyn King—

  5. Michael Temple Says:


    I could not agree more with you about the Repo situation.

    Check out this chart

    (I hope I linked to the proper chart)

    Something is most definitely broken in the Repo plumbing. If a condition persists for months, and not days, it is a systemic, not technical, problem.

    What is scarier is that the Fed never saw it coming and may not have the insights that Pozsar has that the system may be broken and requires massive new QE4 to flood the system with reserves and liquidity.

    I think QE4 could become monstrously big for two HUGE reasons.

    1. Treasury needs to fund over $1trillion in deficits each year for the next decade, per CBO. If we hit a speed bump recession, deficit could blow out to $2 trillion. Such numbers are daunting for a UST market that cannot finance itself when the “everything bubble” is as strong as ever. Who will buy all those long duration USTs in the 2020s?

    The Fed, of course.

    2. As Yra highlights, the era of negative yielding bonds could be coming to a screeching halt in 2020 given the sprouting signs Yra highlights. So, if Euro shirt rates rise towards ZERO and cause overall yields to rise, USTs are fated for a similar rise. And if EUR should suddenly enter a virtuous circle, a lower USD will further tarnish the value of UST duration bonds

    Yet, UST will continue to have to find buyers for $1 trillion plus of USTs. The Jeffrey Gundlachs won’t invest in. 1 or 2% handle 10 year, especially with PCE deflator already running at 2.1% and the Fed having announced it is prepared to let inflation run hot.

    If inflation hits “just” 3%, shouldn’t UST 10 yr yield at least +150?

    Already, PIMCo and others are banging the drums to buy TIPs. Seems logical.

    Also, why own bonds if you believe Stocks herald good times?

    So, I agree that the Repo mess will soon prove to be intractable once we get to mid January and there is still a strong bid for collateral.

    Monstrous QE4 lies ahead.


  6. ShockedToFindGambling Says:

    Yra……Good post.

    Nothing new here from me, but my take on the China trade deal is that they will stall on Ag purchases from USA (have already started buying in Brazil and Argentina) ……..I don’t believe they have any intention to honor the deal, unless they can buy Ag products that they need, cheapest here……they do need our pork. They have already said Ag purchases are subject to WTO rules.

    They know Trump will likely not cancel the deal leading up to the election, and they will just wait until after the election, to start renegotiating with……Mayor Pete?

  7. Bellino Says:

    If John Connolly, The Rotten Heart of Europe, is correct that 10% of German GDP must be transfered in perpetuity to loser euro countries, fiscal stimulus will just make the rich richer and the poor poorer.
    The rich will love Lagarde, the poor will be outside in the cold looking in.
    On the bright side, it will be cheaper to vacation Spain, Italy etc, as long as you don’t mind ‘wall to wall’s tourists. Take the family to Baffin Island, no congestion there.

    • yraharris Says:

      Bellino–John Connelly was Secretary of Treasury while it was Bernard Connolly—but you are indeed correct about Lagarde being loved by those with assets—just like Wall Street has done so well under Mr.Portfolio Balance Channel

  8. Chicken Says:

    Obviously it’s all a farce, thus my ball-park estimate is the entire market is collectively worth approximately $6, +/- $6.

  9. Mike Temple Says:

    Mark my words.

    Folks are soon to be focused on the widening of UST2/10

    Looks like the beginning of a big reversal, especially in light of the inversion reached earlier this summer.

    Weaker USD ahead, especially if ECB follows Riksbank and begins to hike rates to lessen/escape NIRP.


  10. A.M. Look 12/17/19 | Says:

    […] […]

  11. A.S. Says:

    Yeah, I just ended up being :s lol in the pound this Dec aaand got all those; election, BoE meeting ..
    ending 20% on the yr .. attempt? No they passed it, and the only reason she did was b/c ..NDAA, USMCA (yea, finally) and created Space Force .. Pelosi is doing what?

    .. so, you pass it in the midst of an impeachment to the Senate (GOP) to get signed by Trump (whose it is) and you want to take credit for it.. how? ..

    I’m wondering why would there be neg int.rates in Sweden ..Europe, ok, but not part the of EMU ..
    Yra 😀 that’s the best; fiscal stimulus = moving off neg rates ;p lol.

    Yea FT fake news but anyways I’d be hard pressed to find cap flows going to Europe; for them to reach the level of the U.S (2.25 ok 1.75 still way better than ..minus..)

    Mm..hang on, hang on .. you can’t .. we can say Germany won WW2 economically (even if got bombed, but, stay w/ me) the ECB is in Frankfurt however Lagarde/ECB is not vis-a-vis Germany..can’t be; concerns the entire eurozone ..

    Wait, Spain, Portugal nada Italy (still a problem) (and didn’t do much , for this reason lol still a problem always have, actually, been since the 80s) they stress tested the banks but..Greece, but that was IMF; no the ECB did nothing ..

    Well Germany s’pposedly gets paid to borrow which, I haven’t seen any proof of this .

    May – how to lose a referendum call an election nearly lose, botch it ..
    lol no/t to be racist, at least Lagarde is European what (diversity?) is this mania w/ the BoE hiring non-Brits? Quotas? ..

    Well, you know, Dimon has changed his stance on btc 5times, so ..

    Yea, this business of banks leaving /UK is just nonsensical ..

    ..BoJo as Trump? Trump equally has a solid win, the charges against Boris on the Brexit referendum, oh, look, as someone willing to ( actually ) uphold the will of the ppl waay 😀 they brought them out now ….they do lie abt them both I’ll give you that ..

    Trump undoubtedly won the pop vote too if you deduct the illegal vote..this is why they had to shutter the election commission; too revelatory ..
    There is no way, Yra, no way that the Dems would field a centrist candidate. I was (still am?) a conservative Dem but this party ..As Sen Lieberman said these no longer are the same Dems, Dems of the 90s that they liked to fight against. Strong on defense, pro trade, pro reform. We have gotten hijacked by a group on the left.

    ..what has happened now is Trump moving to the center, the golden middle, and the left gone to the deep end .. Braziü

    This is astonishing; you guys are blaming the president, essentially, for leveling the playing field/how China has been ripping America off ..

  12. A.S. Says: farmers:

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