Notes From Underground: And the Concerns Continue

On Tuesday global equities were down a very modest amount. The U.S. DOLLAR continued it move higher as the growth story and positive nominal yields is enough to push global investors into the U.S., the center of complacency. Commodity prices started off  weak but OIL, grains and even COPPER found some buyers.

The most significant moves were in the PRECIOUS METALS: GOLD, SILVER, PLATINUM and, the darling of all speculators, PALLADIUM, all put on significant rallies. The $225.00 rise in PALLADIUM prices perplexed those who perceived that the demand shock potential from COVID-19 would have the GREATEST impact on global auto production. It seems that Tuesday PALLADIUM and PLATINUM cared not about any concerns about their industrial uses. Why?

The global financial system seems to be gearing up for massive actions by the global central banks in an effort to calm the potential headwinds that a deflationary fallout would force upon the world. There is a NEGATIVE FEEDBACK LOOP in motion as the U.S. DOLLAR rally against the emerging market currencies will force corporate debtors in emerging economies to push goods out at depressed prices, from commodities to manufactured goods. Regardless of how slow economic growth turns the DEBT has to be repaid.

There is TRILLIONS of U.S. dollar-denominated debt coming due over the next 18 months. There was an opinion piece in the Financial Times Tuesday by IMF Director Kristalina Georgieva titled, “IMF CHIEF: We Are Rethinking Our Advice to Emerging Markets.” In the piece, which I believe is long overdue, Georgieva raised this critical point:

“New research indicates that while emerging markets are deeply integrated in global trade, their trade is disproportionately INVOICED IN DOLLARS and consequently flexible exchange rates provide limited insulation. Similarly, while emerging markets are substantially integrated in global capital markets, their foreign debt is denominated EXTENSIVELY IN DOLLARS. That can cause exchange rates to become SHOCK AMPLIFIERS as they can suddenly increase debt service costs and liabilities.”

This is the negative feedback loop that can send the global financial system into a deflationary spiral.

It is for this potential feedback that Federal Reserve Chairman Jerome Powell needs to CUT INTEREST RATES/OR OPEN MASSIVE SWAP LINES TO EMERGING MARKET CENTRAL BANKS that don’t already have access. There is a GLOBAL FINANCIAL CRISIS LOOMING. The recent price action in GOLD, COMMODITIES and, of course, the flattening of the yield curves portend GLOBAL CONCERNS about what the IMF director warns.

It is not inflation driving GOLD higher but concerns about central banks panicking in an effort to fight their dread of deflation in a fiat currency world. If Powell did this correctly he could head off some of the immediate fears by maintaining the cuts would be immediately removed if the COVID-19 virus proved to be a short-lived drag on global growth and potential financial impacts.

This potentially has much larger implications for the world’s financial system. Again, who is this guy Jerome? It’s time to be forthright and explain this is not meant to assuage equity investors but those economic actors with DOLLAR liabilities. Jerome do the math. Again, GOLD made even higher highs against many of the world’s currencies. Powell, it’s time to heed the wisdom of Paul Volcker and listen to the wisdom of market signals: gold, dollar, yield curves et al.

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17 Responses to “Notes From Underground: And the Concerns Continue”

  1. Michael Temple Says:

    I wrote some comments on your earlier blog post that pertain to tonight’s missive.

    I will simply add the following.

    It is harrowing to consider the possibility that neither Powell nor Mnuchin have even contemplated how precarious conditions are and that we face a very real possibility of a Lehman 2.0 situation (no, not the bankruptcy of a firm) in which a HUGE SHOCK to the system caused a relentless drive into USD which waylaid so many international debtors of US-denominated obligations.

    Again, truly scary that these “geniuses” don’t appreciate what is suddenly happening. TECTONIC moves that can possibly SHAKE FINANCIAL MARKETS if they don’t get ahead of this NOW.

    If the National Security apparatus is actually telling POTUS that the Covid situation on the ground in China is far far worse than China is admitting, and if it is somehow on its way to becoming something closer to the Spanish Flu outbreak of 1918 rather than SARS, then it is downright criminal if Mnuchin and Powell have not been “read into” these FACTS and the dire implications they have for USD funding markets!!!

    Maybe some who reads your blog can do a patriotic duty and actually call Jerome and ask if he is on top of this fast moving situation.

    To date, it seems as though Powell is oblivious to it. He says they are monitoring the Covid situation. Yet, if that were true, action plans should have already been activated, such as swap lines to provide INSURANCE.

    We shall see



  2. TraderB Says:

    Do you remember when the Trump Tax Cuts kicked in? Employment was at record lows. Congress still operating at a huge budget deficit. Fed Balance Sheet runoff was on “auto pilot”. Fed Fund Futures were pricing in four more rate hikes. People were wagering spirits on if the 10 year would hit 4%. That was only 16 months ago.

    What changed? Economy is still roaring. Unemployment at record lows. Fiscal policy loose as ever. VC Funds are having contests whose startup can lose the most money per dollar of revenue gained. Retail investors are gloating about “their” FaceBook and “their” Apple.

    This is the definition of froth. The definition of Euphoria. Yet the FED can’t raise rates. The market is actually pricing in another cut. What are we all missing here? Why is this so confusing? It is actually pretty simple: The FED can’t raise rates.

    • yraharris Says:

      Trader B—you are correct .We know they are trapped and like the ECB—it is a redo of Bronx Tales—now youse guys can’t leave.Come in for a beer,knock a few things over and hope you can EXIT but find the door way smaller or totally blocked.The POWELL pivot aided and abetted by the Trump driven fear of tariffs allowed the President to push Powell to a policy he didn’t wish to travel–the issue of raising rates while undergoing QT balance sheet reduction was ill-advised as Boockvar,Bianco,Druckenmiller and NOTES FROM UNDERGROUND conjectured—-so here we are with a new crisis for the global economy–but equity owners ride the liquidity on the sea of madness

    • David Richards Says:

      So true that the Fed can’t raise rates as the US is insolvent and can’t pay the interest on its debt, never mind pay more interest. The Fed is feigning US bankruptcy by funding the US Govt through massive buying of short-term treasuries (where USG mostly borrows) and monetizing it.

      This issue is at the heart of the US Repo crisis that still rages on but deceptively appears to be subdued temporarily by massive Fed printing and “funding”. Precipitated last year after foreign official UST buying became selling (no longer funds US profligacy), and the Primary Dealers became saturated with UST’s and due to Basel III regulatory requirements are forbidden from buying more Treasury issuance as they’re otherwise obligated.

      So instead the Fed buys the T-bills with printed money through a middleman whilst the US government is in fact by far the most short dollars of anyone on the planet.

      Therefore, the US is now forced to choose among 3 bad alternatives (or a combo of them):

      1) Hugely slash “entitlement” and defense spending.
      2) Allow defaults, watch things implode and society breakdown quickly.
      3) Print-print-print a la Argentina, Venezuala, Weimar and watch society breakdown worse later.

  3. asherz Says:

    As to the strength in the dollar, Desiderius Erasmus said 500 years ago:
    “In regione caecorum rex est luscus. ”
    In the land of the blind the one-eyed man is king.

    The rest is commentary.

  4. Judd Hirschberg Says:

    Thanks Yra for your vision! The room @ Whitewave has been long Gold against Short Euro & Suisse for a long time. Your comments and those of your readers like Temple just bolster the case to stay the course.

  5. Yra Harris on Risks to the Global Financial System - Investing Matters Says:

    […] LINK HERE to the Article […]

  6. ShockedToFindGambling Says:

    When the crisis hits, yield curve should steepen.

    FED ease will be anticipated, and ability of Treasury to pay back longer dated bonds in a sound currency will be questioned.

    The difference between the USA and Greece is that there is someone to bail out Greece.

    • David Richards Says:

      US yield curve control then. It was done for years post-WW2 and betcha they’ll do it again, fast. And maybe force ppl to buy UST.

      But the US today is a far cry from the US post-WW2. Today the US suffers twin deficits rather than enjoys twin surpluses like US before and Japan lately (which has had yield curve control more recently).

      So the experience in yield curve control in US today will be very different than it was post-WW2 and in Japan lately. Instead, yield curve control in the US could be disastrously similar to the yield curve control we’ve seen in Argentina, which IMHO is the closest financial protege of the US today. Argentina also forced their captive banks, pensions and individuals to buy and own crappy Argentinan bonds. US could follow.

      Should be good for BTC and gold, to a much lesser extent stocks and select risk assets, but awful for treasuries and USD.

  7. Michael Temple Says:

    In other developments overnight, Covid news continues to be concerning.

    2 passengers on the Diamond Princess have died. Confirmed cases
    on board have reached 621. This is an almost perfect control group to study. If more than 12 people die, then we may have a far better indication that Covid is more lethal than the currently expressed view of just 1-2% mortality rate.

    Elsewhere, SKorea has now announced that it has more than 100 infected. Previously, it was HK and Singapore that were leading the pack. Now, we learn there is a bloom in S Korea.

    There are two alternate realities right now.

    FACTS on the ground with Covid (which continue to look negative)
    And, FACTS in the stock market, where no news is ever bad enough
    to derail the inmates from buying more and more, no matter how many earnings warnings their beloved Apple (and others) may make.

    Meanwhile, USTs still aren’t buying what the stock market is selling.

    This morning

    UST 3M 1.57%
    2 yr 1.40%
    5 yr 1.38
    10 yr 1.54
    30 yr 1.98

    Global capital continues to flood into USTs, confounding all the cockeyed stock optimists.

    A crack through/below 1.50% on UST 10 yr yield could trigger a bond breakout….NOT what the Fed wants to see. Nor should it be pleased to see gold up another $5 overnight, as well


  8. Michael Temple Says:

    Good Morning

    With UST 10 yr now yielding 1.49% and 30 yr 1.92%, the entire
    US yield curve is trading below the official interest rate.

    Heck, every bond from 2 yr to 10 yr is trading through the Fed Funds rate of 1.50-1.75% (isn’t it time to drop the silly range).

    Situation reminds me of the Verizon ad. Bonds are SCREAMING to stocks


    Curve continues to invert a tad more each day, while USD grinds relentlessly higher. Yields are simply following that path of least resistance. Stocks, on the other hand, stubbornly refuse to take precaution, partying on atop the deck of the Titanic despite the icebergs rushing past them.

    NOT predicting a stock market crash….But, the longer this rubber band gets stretched, the harder the inevitable pullback (NOT Crash)
    shall be. Mean reversion to the 200-day MA is roughly 3000+ on the S&P.

    Covid news is not getting better. S Korea is now in panic and Hubei
    remains on lockdown until March 11. Lord help us if another Covid
    bloom blossoms in some other SE Asian country.

    Apparently, Abe chose NOT to scale back commercial flights between Japan and China at the outset like so many other countries. Some speculate he was trying to curry favor with Xi at his time of distress. Again, imagine if Tokyo gets hit with an outbreak.

    Finally, what is gold reacting to if not RISK OFF conditions. Or, at the very least, a huge insurance cut of rates soon to come from Jerome, which again, would seem to come only AFTER a RISK OFF
    event in stocks.

    Should be another fund day on the playground


  9. Michael Temple Says:

    It’s 2:15 and just 105 minutes until the close.

    Will PPT step in at the 11th hour to keep things from collapsing into a truly ugly frightening close?

    If SP were to be down 60 and Dow down 500, I think it could be a very LONG weekend.

    Let’s recap a few things here today….Some monumental, some just mundane.

    In no particular order.

    1. UST 10 yr now trading at 1.46%. This marks the 3rd time it has plumbed this level–first time in July 2017 and again in mid 2018.

    As many technical minded folks know, usually the 3rd time is the charm when assaulting key support/resistance.

    What could possibly propel UST 10 yr yield substantially lower?

    Hmm…Continued Covid outbreak which has now produced very worrying circumstances in S Korea and Japan.

    Two S Korean cities under quarantine. Japan increasingly concerned. And now CDC warning Covid is surely heading here to US and we are woefully unprepared.

    Such real world worry/concern will simply further gum up industrial commerce/trade which further squeezes dollar shorts.

    Ergo, Fed may be closer to a rate cut than any of us can imagine, despite their protestations otherwise.

    2. EDH0/EDH1 March 2021 Eurodollar contract is trading 42 tics higher, implying almost 2 full rate cuts over the next year.

    With UST 2 yr yielding 1.34%, a “traditional” spread to Fed Funds of 50 bp would imply FF at 84 bp, not the silly 1.50-1.75% range, today.

    So, both Red EDs and 2 yr UST yield strongly show market expectations of 50 bp cut coming, and coming soon.

    3. Gold….Gold seems to have gotten the memo, as well. I think it may have picked up some extra speed today on the back of Lael Brainard’s continued comments that the Fed has at its disposal yield curve capping operations to fight against lack of inflation.

    Certainly seemed to stop USD, at least for the day. But, it also shows that the Fed and all CBs will stop at nothing to combat the coming recession. Formal QE seems an almost foregone conclusion, at this point.

    And, consider this…..NOT QE has been done at a FEROCIOUS pace. Fed has basically unwound 12 months worth of measured/autopilot QT in half the time.

    And, as you and I have discussed, there are strong strong indications that the Repoggedon story (starting back in September) may have as much to do with even wider/higher financing rates
    in US dollar FX swaps which drained liquidity away from traditional Repo markets into FX.

    So, if true, then the strain in FX USD swaps is even more incredible as the huge slowdown in global trade adds to the shortage of USDs that normally circulate as the natural consequence of foreign trade.

    4 Finally, while stocks have shown extraordinary resilience this year, today’s price action in the FANGs looks concerning.

    To date, FANGs (and most stocks) have shrugged off the Iranain kefuffle and the actual Covid outbreak…Covid has been a big
    head scratcher as everybody is suddenly an epidemiological expert and just “knows” that the pesty Devil Virus will peak within days/weeks based on propaganda statistics from China.

    Meanwhile, Beijing is nearly on lockdown and more portable incinerators are seemingly headed to Ground Zero, Wuhan. Yet, stocks have been ACKNOWLEDGING all this and simply believe it will peak soon and they don’t want to miss the V-bottom.

    Yet, even if you believe the worst has peaked, we now see troubling outbreaks in S Korea and Japan. And, curiously, JPY is getting hammered, perhaps in a bow to the reality of a huge slowdown as a derivative of the China Inc story….Traditionally, JPY rallies hard as a “risk off” haven. Not this week. Something to watch, I daresay.

    5. Back to FANGs….Some very bad action today in these stocks. As we are approaching month end next Friday, if these losses stick and/or get worse, the monthly charts will NOT look good.

    Perhaps Jerome will finally get his stock market pullback to give him cover finally to cut.

    6. Final observation. I always keep an eye on the ratio of gold/S&P
    Since gold peaked in 2011, S&P has trounced the return of gold.

    Yet, a key technical resistance at 0.50 is very close to being breached if gold/S&P continue their respective moves right now.

    The ratio peaked every so briefly above 0.50 on the January night of the Iranian missile launch. But, gold arrived at a horribly overbot condition, matched only by S&P’s equally oversold condition that night.

    Today, however, gold is in far far stronger technical (and fundamental) shape while S&P may finally be running out of fuel after this torrid FOMO momentum move.

    Hyperbolic charts such as Tesla and Virgin Galactic are breathtakiing. And even Apple has defied gravity up until today despite warning on weaker numbers due to Covid and providing NO
    forward guidance.

    Add it all up and I think things are going to get very interesting for stocks here rather soon.

    Bonds and now gold have been screaming to stocks


    Inverting yield curves, plummeting treasury yields, strong and stronger USD, and finally catapulting gold prices have finally
    left stocks all alone on Survivor Island.

    Freight train moves in USTs, yield curve and USD….We would be talking about these tectonic moves if it weren’t for the truly orgasmic
    price moves in Tesla and other such high flyers.

    Stay tuned for some wild and woolly markets in the next couple of weeks.

    Heck, I even forgot to mention the awful PMI number this morning, suggestive of a domestic slowdown.


  10. Michael Temple Says:

    The Covid news continues to worsen, as S Korea, Italy and Japan all face blooms now.

    And with Samsung having reported a factory worker was infected, how is it not possible that that plant won’t be shut down for at least 14 days?

    SKorea now battling over 400 infections and two major cities are quarantined.

    Things are going to get much worse for the managed Chinese propaganda narrative. Why?

    The first casualty of war is truth. Xi has declared a People’s War on the Devil Virus. His propaganda forces are as busy and active as the medical corps. (By the way they just announced the construction of 19 additional pre-fab hospitals in Wuhan…Hey, wait, I thought cases were now peaking in Wuhan….Oh, never mind)

    Now that Covid has infected countries such as S Korea/Italy/Japan where truth gets reported, we now learn that S Korea has decided
    to lock down 2 major cities and Italy has locked down 12 northern towns.

    What’s the big deal? Here’s the big deal….These two locales have reported 400ish and 200ish infections, respectively. Yet, they are going into LOCKDOWN..

    So, please explain to me how it is that Shanghai and Beijing, which almost assuredly have as many infections as S Korea and Italy, and probably far more, can possibly evade LOCKDOWN conditions and not expect further spread.

    Anyway, not the end of humanity.

    But, the gears of commerce are NOT returning to work in China any time soon….And now Samsung, the symbol of S Korean business success, is waylaid.

    I highly doubt that stock markets have priced in the inevitable commercial slowdown now in these other markets.

    Heck, even Milan has now reported one infection.

    Lord help the markets (and humanity) if Milan or Tokyo or Seoul succumb to lockdown conditions if Covid takes hold.

    I repeat….Stock markets have focused ONLY on the imminent V-shaped rebound ahead in China….OK, it may come…But much much later than Q2, if you ask me.

    And, clearly, stocks have not yet discounted the commercial slowdowns that appear to lie just ahead for S Korea and northern Italy (the part of Italy that actually is a world class manufacturing hub).

    Expect the torrid UST rally and yield curve inversion to continue next week, although it may pause Monday/Tuesday to consolidate the HUGE gains on Friday. Same goes for gold, which seems finally
    to have “gotten the memo” from USTs.

    Equities are almost always the last to “get it”….Although the FANGs looked quite punked on Friday….If those losses continue next week (not a crash, but simply going lower), the monthly charts are not going to be looking pretty come the Friday close.


    • yraharris Says:

      Mike—chasing me into retirement?Really good additions and informative.Provoking and prodding is what makes for quality investment decisions.This is not screaming but well written ,thoughtful pieces from a man steeped in the better efforts of the iVY League—well done and as you write the virus is spreading almost retracing the steps of Marco Polo .

  11. Michael Temple Says:

    Good Morning

    Or, more probably, Not So Good Morning for Global Risk markets

    Overnight, S Korean news has worsened.

    It is now confirmed that both Samsung and Hynix have temporarily
    closed a manufacturing site. Samsung is putting on a brave face and saying their plant may reopen Tuesday, whereas Hynix has already admitted a shutdown of at least 2-3 weeks. All due to Covid

    Also last night, Italy declared a “National Emergency” over Covid and quarantined at least 12 towns in northern Italy. Reports now of the first infection in Milan. Some speculation that Italy may have to consider possible suspension of Shengen travel laws which permit
    unfettered travel across the 28 EU countries for EU citizens.

    And, where the rubber meets the road, one of the very few bourses that is open today is Tel Aviv.

    The Tel Aviv 35 Index (leading Israeli companies) is now down 2.3% as it heads towards its close.

    I would submit that, as of Friday’s NY close, S&P had not priced in even ONE SCINTILLA of the weekend developments in S Korea and
    Italy. Final note….US has raised its Travel Advisory to Japan to Level 2…In short, don’t go if you don’t have to be there.

    Expect to see a sea of red in overnight markets tonight, along with further blistering price action in USTs as RISK OFF drives capital even more maniacally into the safe haven of USTs.

    Hey, Jerome, CAN YOU HEAR US NOW


  12. Michael Temple Says:

    Yes, good point about the ghost of Marco Polo!!
    Sadly, it feels more like the wrath of Ghengis Khan!


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