Notes From Underground: A Microscopic Germ Packs a Wallop

There is no doubt little organisms can wreak havoc in ways that blowhards could never imagine. People are trying to assess the financial impact by looking at previous pandemics. This is flawed analysis because each pandemic is different depending on the global circumstances and the morass for incubation. During the Cold War people did not move freely so political containment acted as a drag on the spread of disease.

Today, money moves quickly but as we know more people travel for work and leisure at faster speeds than at any time in history. It more than two weeks to go from Roscov to the U.S. 100 years ago. (There is a ships manifest in my drawer that proves it.) Everybody would be locked in the ship for the incubation period limiting the spread. The point is to be CAUTIOUS in comparing outcomes from previous pandemics. The speed at which we move around the globe absolutely makes this time different.

If we move beyond the virus for a brief moment we can acknowledge some other global concerns:

1. There is a situation brewing in Argentina as the IMF says the “country’s debt is unsustainable.” In a Bloomberg op-ed by Mohamed El-Erian, he said the “finding of excessive indebtedness is a 180-degree turn for the IMF, which only a year ago was lending Argentina large amounts of money, and to creditors who initially couldn’t buy enough of the country’s bonds, including a heavily oversubcribed 100-year issue in 2017.” Argentina owes the IMF some $44 billion in what are deemed  super-senior loans.

If the FUND has to take a large haircut or offer another type of relief other creditors will also have to endure pain. The issue for traders is the unprecedented hit the IMF may have to absorb may result in the need to raise CASH. My fear is a potential GOLD sale, but in times of IMF GOLD sales past it provided an opportunity for buyers at better prices.

The IMF sold 200 tons of GOLD to India in November 2009, which resulted in a $25 drop but the next day the GOLD began a sustained rally to more than $1220 an ounce from $1042 over the next three weeks. When large buyers absorb one-off sales it has a history of being construed as BULLISH. The same action occurred when the BOE unloaded its GOLD hoard.

2. There was a story in the Financial Times on February 20 titled, “Why Sweden Ditched Its Negative Rate Experiment.” This move gains importance especially as it appears as if there is movement for some type of coordinated monetary stimulus from the world’s key central banks. President Trump is utilizing the White House bully pulpit to push for ever lower interest rates. The article quoted Jakob Carlsson, the CEO of the Swedish life insurer Lansforsakringar Liv who said “sub-zero rates a mistake as they force people to save more and spend less.”

ECB board member, and German economist Isabel Schnabel, made the case for negative rates when she said it’s “all to often combined with claims and accusations that have no basis in fact.” Schnabel maintains that the average German saver is out 500 euros while borrowers have saved more than 2000 euros. Berlin has benefited from billions in interest rate savings. This is the height of financial repression and is the paradigm of the political economy. Whose OX is being gored is critical and results in politically uncertain outcomes.

The rise of the AfD has has a far greater impact than economists like Schnabel is willing to acknowledge. This takes on added importance with the now scheduled G-7 finance teleconference for Tuesday morning with the central bankers planning on joining the discussion. Monday’s late action in the U.S. Treasury market is saying the G-7 ministers and bankers will be leery to get too aggressive on an immediate rate cut. Although April FED FUNDS contract is anticipating an FOMC move by the end of March.

The rally in the EURO suggests that the OWL perched at the ECB will keep any rate cuts on hold in favor of fiscal stimulus. Japan will do all it can to preserve economic growth with the Olympics only four months away.

3. At 9:30 p.m. (CST) the Reserve Bank of Australia announces its interest rate decision. The CONSENSUS is for a 25 basis point cut. The surprise would be NO CUT as the drop in commodity prices coupled with the wildfires have made policy makers nervous about economic growth going forward.

If the RBA doesn’t CUT rates it may send a BULLISH signal for if the Aussies are not as concerned as the other developed world’s leaders then maybe we should all take a step back. The recent 10-year lows in the Aussie dollar will provide some cushion for the Aussie economy and therefore not make an interest cut a necessity. Watch the action on a no cut and be patient.

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10 Responses to “Notes From Underground: A Microscopic Germ Packs a Wallop”

  1. nserebrenik Says:

    My thoughts on Argentina’s 100 year bond always where dubious. How hungry for yield where those investors that they threw their money to the Peronistas hoping this time they would pay. It was like watching a slow motion car crash

  2. Michael Temple Says:


    Yes, it is a paradox, but bull markets actually do require LARGE sellers to help satisfy the deep appetite of the buyers.

    So while an IMF sale may cap gold, I am not sure it will last long.

    Examine closely those IMF words concerning Argentina and its finding of “excessive indebtedness”.

    Excessive indebtedness, indeed. Total global debt is estimated at $250 Trillion, or 3X annual Global GDP.

    Puerto Rico….Excessive Indebtedness
    US Shale Industry. Excessive Indebtedness

    Too many investors hold as ASSETS the very excessive liabilities of so many debtors, both corporate and governmental entities.

    JP Morgan, himself, said that gold was money. All else is credit.

    Gold is one of the very few assets that is not somebody else’s liability.

    Hundreds of billions in capital (heck, maybe even trillions) have flown into USTs in the past few weeks. Trying to flee others’ “excessive indebtedness”. Some small amount of that scared capital flowed into gold and it spiked $100 from $1580 to $1680 before PPT action and margin liquidation knocked it back down to that breakout level. Yet, gold popped back up today to $1600

    In short, in a world of excessive indebtedness (the IMF’s words), gold might prove to be a far better play in the long term than UST 10 years yielding 1.18%ish tonight, denominated in a currency that will undoubtedly be debased as The US attempts to service its “excessive indebtedness”.

    We are already financing $1 Trillion annual deficits while the good times are here. The next recession, if it isn’t already on the doorsteps, will probably see our annual deficit blow out to $2 Trillion.

    Once the Covid crisis passes in the coming year (fingers crossed), how many foreigners will continue to provide the kindness of strangers to our excessive borrowing.

    In short, the liquidation of “excessive indebtedness” might just lead to a gold stampede. Such excessive indebtedness of the PIIG nations in 2011 produced the last horseradish rally in gold to its then all-time high of $1900 before Super Mario saves the Euro.

    Watch the widening of that yield curve. Much more important than the gyrations of the stock market.


  3. Michael Temple Says:


    Interesting anecdote concerning gold, excessive indebtedness, Pierpont Morgan, and Andrew Carnegie

    Morgan arranged the buyout of Andrew Carnegie’s steel empire to create the modern day US Steel. Perhaps, the first ever LBO.

    Do you know how Andrew Carnegie asked to be compensated for selling his stock to the newly-formed company?

    He was fearful of the future fortunes of the company, which he would no longer control.

    So, he took payment in the form of 5% 50 year gold bonds!!!!

    It will never happen, but IMF could probably raise more cash and more efficiently if it chose to hypothecate its gold via a “gold bond” sale.

  4. Asherz Says:

    Yra- You’ve been calling for a 50 basis cut for some time. You may get your wish soon. Probably at the next market downdraft if not sooner. The yield curve is crying for it. Mr. Powell is feeling his collar getting very tight and sweat beads on his brow are making him uncomfortable. He doesn’t want to be blamed for what may lie ahead. All this is bullish for gold as the bullion banks are giving those who are looking for another entry point for buying
    that relic, with price suppression. The relief rally today in equities retraces some of the too sharp drop that took days and not weeks. The exhale you are hearing is being touted as the largest one day gain in history. That it was. But don’t break out the champagne yet.

    And check that manifest. Was it Rostov or Roscov?

    • yraharris Says:

      Left Roscov and then I believe to London and the SS Braga—-arrived on Ellis island September 1, 1923—but it says Roscov in Ukrania

      • yraharris Says:

        and the money they had was $20—and i know two gold roubles[kopeks] that my father at some point put into a gumball machine and my Grandmother had to plead for their return—a precursor for Mike Temple and the IMF

    • Michael Temple Says:

      You win the prize for closest to the pin with today’s 50bp cut by Powell.

      Gold action very telling, as it is rallying more than stocks today in the current RISK ON trade.

      Yield curve continues to steepen and USD getting hit. All very supportive of gold.

      Meanwhile, gold stocks are now ridiculously cheap.
      Despite the plunge in gold last week, today’s spirited rebound puts gold well above its Q4 price. And, as I have said before, miners are now all experiencing a 900 BP decrease in operating costs as oil has collapsed 30%.

      Let’s see how much Wilder and crazier markets will be throughout the day.

      But, kudos to the Fed for finally catching up to market realities. While Fed may now have only 100 BP of rate cutting ammo left (I do not foresee NIRP), it has limitless QE boundaries to effectuate more easing.

      Pretty good backdrop for gold going forward


  5. The bigman Says:

    Asherz is prescient- nice call but WTF Trump successfully jawbones from the bully pulpit on Saturday market goes up 1300 on Monday and then Powell cuts the next day? Meanwhile the modern wooly mammoths(CBs) sink lower into the tarpit of lower rates. Japan just bought a 100 billion yen worth of ETFs and their stock market responded by dropping. Where did that 100 billion come from before disappearing in the tarpit? is this a more brazen version of the SNB turning francs into dollars/euros and than buying stocks? Volcker must be turning over in his grave When does Bretton Woods 2.0 meet?

    • yraharris Says:

      Bigman—you are stealing the thunder of the next blog–the SNB is the most significant issue and not a peep.Also,the G7 meeting today with its silly statement was giving the NOD to the US to cut in an effort to weaken the dollar–the SNB is critical to all of our understanding the role of central banks—stay tuned

  6. Michael Temple Says:

    What a day. In short, I think odds of another 25 bp FF cut at FOMC meeting are almost a certainty.

    Repo today of $120 BN. Fed should stop the pretense and simply directly go to QE, which is quite likely to be discussed/mentioned if Fed cuts 25 in two weeks.

    More later


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