Notes From Underground:

In the 1960 classic film The Time Machine a traveler visits a future civilization in which a group of people is enslaved as a source of food. The food source are zombie-like and kept in comfortable captivity in an effort to control their protein source. After violence is done a siren sounds. When the time traveler questions the meaning of the siren the answer is it is ALL CLEAR but we never know what is all clear. Well, it seems the Coronavirus has been given the all clear signal based on the value of equity markets.

The enslavement of global investors to the siren call of extremely low interest rates and the $10 trillion on negative territory has provided the ALL CLEAR. The zombie ELOI of which WEENA is a member has been replaced by the zombies of passive investors. All clear, indeed.

Except that it is not all clear as the U.S. dollar has not retraced its movements before to the onset of a global growth fears. Also, while the commodities had a relief rally Tuesday, copper, oil and any other commodities remain at much lower levels than prior to the spread of the Coronavirus.

Weena, it’s all clear but the until global financial markets are weened off the intoxicating elixir of cheap money the zombie behavior continues.

***Tuesday night the RESERVE BANK OF NEW ZEALAND announces its intentions for its overnight lending rates. The consensus is for no change to the overnight cash rate, which is currently 1.0%. The recent strength of the kiwi versus the Aussie dollar provides incentive for the RBNZ to lower its rate to 0.75% in a move to match the RBA and allow the KIWI to weaken versus its main competitor for the Chinese market. Governor ORR has room to move under cover of the negative impact from the Coronavirus.

Last week the Aussies held rates steady but with the recent increase of cases in China and threats of a demand shock in the Chinese economy the RBNZ certainly could not be criticized for taking out INSURANCE over fears of an economic retrenchment in China. Also, New Zealand is the beneficiary of a great deal of tourism, which gives them even more leeway.

***On Monday the EURO currency fell against most of its peers as the political news became as negative (as is the recent economic data). On Sunday, the Irish elections surprised by elevating Sinn Fein into a possible position in a new government. The resurgence on the left is a sign that people are disturbed by the status quo. The Irish economy has recovered and Prime Minister Leo Varadkar has been a darling of Brussels. Varadkar may find a way to return to power through a coalition but the upset of center-right government that presided over the healing of a damaged Irish economy is not to be minimized.

In addition to the Irish news, AKK, the heir apparent to Chancellor Merkel resigned as CDU party chief. The recent involvement with the AfD in Thuringia by the CDU thwarted the will of AKK and the CDU party hierarchy. Germany is in political disarray as the main stream coalition of the CDU/SPD has suffered many setbacks in regional German elections.

There is a great deal of animosity over Merkel’s immigration policies. But even more important, I think the frictions have been more about the financial repression of the German saving class as former ECB President Mario Draghi’s implementation of negative interest rates has crushed German savers. Real yields in Germany are at a NEGATIVE RATE of close to 2%. German dissatisfaction with ECB policy provides the impetus for new ECB President Christine Lagarde to move faster in an effort to eradicate the efforts of Mario Draghi to crush German savers and bail out the sovereign debtors in the EU.

President Lagarde delivered a speech to European Parliament on Tuesday in which she cited the need for a more complete EMU. She said:

“Let me spell out what I mean by a more complete EMU … a full banking union underpinned by a common deposit insurance scheme; a true  capital markets union that channels investment to innovative and productive uses; and a central stabilisation function as a common line of defence against shocks. A more resilient EMU with these elements would not just help to protect our living standards from adverse domestic and global developments. It would also support Europe’s influence in the world, including by making the euro more attractive worldwide.”

I have said before that Lagarde’s mandate was fiscal harmonization with a EUROBOND. Let there be no doubt that Lagarde has a political agenda in which inflation is a tertiary concern. This weekend’s political developments necessitate that the ECB President  must speed up her TIME MACHINE.

We will watch the EUROPEAN SOVEREIGN DEBT MARKETS  as a barometer of market sentiment as to the potential success of the wizened OWL (not a dove, not a hawk.) It will take phenomenal sight to see in the dark corners of the EU.

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4 Responses to “Notes From Underground:”

  1. kevinwaspi Says:

    Yra, you have beaten the drum for Eurobonds (even gold backed) for years. I think Mme. Lagarde reads “Notes”. Wouldn’t it be rich if Madame Lagarde fulfills on Mario’s “whatever it takes” statement, by making the euro a desirable currency based on fundamentals?

  2. The bigman Says:

    Boy is the financial MSM going after Judy Shelton this morning. They talk like she is testifying with a tinfoil hat on her head. Rick Santelli just gave her a spirited defense. Makes me think that she may be the one to pull back the curtain on the the CB wizards. Your thoughts?

    • yraharris Says:

      The Bigman—I think that Judy Shelton is a contrary voice that is badly needed on the FOMC Board—she challenges issues especially her views on Interest on Excess reserves.Her discussion on Gold does not belong at the FED but in othere arenas where policy has been made by elected representatives.

  3. Pierre Chapuis Says:

    This post made me think of the 1973 film, that took place in 2022. Soylent Green.
    We are living in interesting times.

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