Notes From Underground: It’s Time For the Owl

Well things are on the bubble as the Russians and Saudis had a “falling out” as lovers often because the OPEC talks resulted in an ostensible all-out war to break oil prices. The consensus loser will be the U.S. oil patch as the FRACKERS are carrying huge amounts of debt, which will not be paid while prices sharply decline.

There will be talks about a credit crisis as banks and other oil creditors will have to absorb losses and probably restrict lending to other borrowers. Those with private equity investments in the Bakken, Permian and others will be taking inventory on how battered their portfolios will be. The wily Putin will finally have his way as the sanctimonious Americans will have to rescind the ill-devised/ill-advised SANCTIONS that have had little impact.

Recently, the Trump administration threatened the final leg of Nordstream 2, which would have completed the European dependence on Russian energy exports. President Trump will have to make a decision on whether the U.S. energy sector and some financial institutions are worth the sanctions and meddling in European energy affairs. Putin potentially can be even more disruptive as he can cause more instability in the Mideast as he showed last week with his raising the hit in Syria with attacks on Turkish troops in the Northeast region.

Under article 5 Nato is obligated to come to the aid of Turkey if tensions mount and a genuine conflict begins. In 1986, oil prices collapsed to $10 a barrel and Vice President George H.W. Bush went to Saudi Arabia to salvage the Texas oil patch by negotiating an end to the Saudi effort to destroy the U.S. oil business. (It was why I never voted for CIA George as I felt it harmed the American consumer.)

How far will the oil prices collapse before the Trump administration realizes the role of Russia in the U.S. economy? On February 10, President Trump and his vainglorious finance team suggested selling 15 million barrels from the strategic reserve in an effort to shore up the budget. They may wish to rethink the funny math. Secretary of State Mike Pompeo will posture that the falling oil prices will harm the Iranians most of all but with all this FRACKING debt coming due over the next 18 months the job losses in Trump states may be enough to turn the White House democratic.

The world is a very complicated place and not packaged as neatly as a realty television show. With Putin in a powerful position in the Middle East the Saudis may be concerned about Mecca and Medina. There many strings to pull for further efforts at disrupting the world order. It is indeed a far more slippery slope than the sanctimonious posturing of stock market watchers wishes to believe. Yes, 2+2=5  when context and nuance is needed.

***To Boston Fed President Eric Rosengren: What were you thinking? You have made an abrupt turn from your no votes last year when worried about the negative outcomes for the financial system from the liquidity provisions by the FOMC in a full-employment economy? On Friday Rosengren suggested that Congress would need to pass legislation empowering the FED to purchase more than just Treasury debt in an effort to rescue a distressed financial system. The issue arose in 2008 when the U.S. central bank moved to provide liquidity to JPMorgan to smooth the path for bank’s “purchase” of Bear Stearns.

Later that year the FOMC stretched the parameters of section 13.3 of the Federal Reserve Act with the bailout of AIG. Former Fed Chairman Paul Volcker warned the FED that they were expanding the law with the rescue. The statute says: “In unusual and exigent circumstances the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members…” but any opening of the discount window has to be to a program with “broad based” eligibility who can not obtain credit anywhere else.

If the FED were to embark upon bailing out those without BROAD-BASED ELIGIBILITY they will be at risk of losing their independence. especially if they opt to purchase equity and or corporate bonds and incur sizable losses. (The ECB has already suffered losses on some of its corporate bond purchases.) Rosengren is pushing for the FED to stretch moral hazard and central bank credibility even farther. This coming from a HAWK of just a year ago.

***The ECB meets Thursday and many analysts are calling for Lagarde to step up liquidity additions CUT interest rates similar to the U.S. I would offer this advice to President Lagarde: Be an owl and do not cut rates. Maybe boost the QE purchases of corporate bonds but if you decide to go that route, THEN RAISE RATES TO ZERO as the QE will be far more important than negative rates.

Use your wisdom to discern that negative rates have been a disaster for the European banks. If my conjecture for the FOMC CUT was to weaken the U.S. dollar then an actual move back to ZERO would hasten the weakening of the DOLLAR. It would also reveal how wrong Larry Summers was when he suggested that the move by the FED would lead to a repeat of the early 1930s with a beggar thy currency war.

The EURO is still CHEAP on a long-term average. The 200-month average is 126.50 with the currency currently at 113.5. There is plenty of room for the EURO to mean revert using a long time horizon. Christine, do not give in to the cooing DOVES for it will enrage the hawks. Be an OWL and invoke wisdom.

A weaker dollar is far more important to the global system at this time of growing stress. Don’t follow the lead of Mario Draghi. Stay strong and let the FED do what it needs to weaken the dollar and steepen its yield curve. It takes great vision to see in the times of darkness.

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27 Responses to “Notes From Underground: It’s Time For the Owl”

  1. David Richards Says:

    Great article, but I feel sorry for the average, unwitting, innocent US household if DXY moves down dramatically towards 80 or so, as seems possible eventually. Bad for those who own no gold, silver or bitcoin or at least some foreign currencies. Which means most US households. Loading up on US bonds still, ugh.

    • yraharris Says:

      Dave—you can have all my bonds staying long the short end and dumping all my longer term debt—insanity and again this is 2020 not 1930 when the gold standard was in effect—fiat currency ain’t worth the paper it is printed on but the credibility of the issuer behind it

      • David Richards Says:

        Yra, at least we can put ourselves on the gold standard. And I’ve read that you need not worry about getting your gold ripped off like FDR.

        I fully agree with you that fiat is likely to be the big release valve. Surely not equities. So too many analysts are using the last playbook from 2007-09 expecting vix to soar more and stocks to crash. Rather than the currrency crashing. They’re not listening to policymakers talk about broadening their support by buying other assets.

        So next collapse, I think sovereign debt takes it hardest on the chin. So no bonds for me, of any duration by any issuer. Plus they’re usually uneconomic to currency hedge anymore, whilst anyone who isn’t hedged could get fired for the currency loss. So I guess the viability of short term bonds depends on your reference currency…. as implied above, mine is gold.

  2. David Richards Says:

    Putin plays chess and body-contact ice hockey. Really. Nuff said.

    In retrospect, I shake my head at the reams of western analysts’ nonsense that I read for weeks which unanimously proclaimed OPEC+ production cuts were a no-brainer. Instead, I should have realized that NO, Putin would kill OPEC+ production cuts because, in addition to the recent Nordstream2 debacle and more that demanded a counteroffensive move by him, no way he’d do anything at this time that’d hurt his best and most reliable ally for years, Xi. Shortly after their last summit and recent opening of the major new pipeline between them that both went oh-so-friendly.

    The game is afoot. Zbigniew Brzezinski is rolling in his grave?

  3. yraharris Says:

    To all—In my humble opinion the key to turning this is the removal of the sanctions in an exchange for Putin cutting Russian oil production.The Saudis are in a bind with Aramco and other issues.Where are the Mnuchin team now—all wishing they were with Dimon—sorry to be so crass but the silence is deafening and precedence exists—-this is not virus tonight but the huge collapse in oil prices so if you let Putin have a victory it will be cheap and the sanctions are not working anyway

    • ShockedToFindGambling Says:

      Yra….good article.

      IMO, it’s not just Corona and oil prices……it’s the Great Unwind of QE/ZIRP/NIRP……..Corona and oil were just the triggers.

      The Central Banks have repeated the mistakes of 2008, in Spades……the destruction of markets/the economy is likely to be much greater this time.

      To paraphrase Einstein, insanity is repeating the same actions, and expecting a different result.

  4. andrew perry Says:

    Yoy change oil, 50% yot change bonds 66%, sp, flat. for me targets 1700 and that will be the end of it!

  5. Michael Temple Says:

    Yra
    Certainly, if Trump decides to do a deal with Vlad to break off sanctions in exchange for an agreement to cut oil production, I imagine W Europe will go along for the ride as folks might even
    agree to dance with the Devil if it means the MARKET BEATINGS/CRASH will stop.

    But, I am not so sure that it is all as nice and tidy as you lay out.

    Anyway, I doubt such a sanctions relief deal could be banged out that quickly as the Saudi countermove only happened just yesterday, causing tonight’s epic CRASH which has clearly REVERBERATED through all other risk markets.

    It is quickly becoming “GO TIME” for Trump to save his beloved stock market from further death and destruction.

    Amazingly, the crash could end at the 200 Week Moving Average of 2600ish for S&P, just about 12% down Friday’s close.

    Still a lot of time between now and Election Day for Stocks to rise again with all manner of support from the Fed, Treasury and Congress.

    But, until then, the margin clerk reigns supreme tonight, as he has clearly cleaned out some winning gold longs to satisfy/offset other
    big trading losses out there.

    OH WHAT A NIGHT

    • TraderB Says:

      If the FED wants to start buying Corporate Bonds and Equities, how does that approval process work? Is that something that can be approved by Congress this morning or is that a timely process?

      • yraharris Says:

        Trader B—good question go read the Federal reserve act section 13 to get some greater sense

  6. Bosko Says:

    Yra, in a round about kind of way, we have a global gold standard because shortly after Nixon closed the gold window, the gold futures contract was created. Even though it’s traded in USD it can be converted to any currency around the world. Like you say it’s about CREDIBILITY, I would also add RULE OF LAW in a nation where one’s assets are held. Imagine a gold-backed Yuan, no thanks.Gold as a save haven is only useful in a nation with respect for RULE OF LAW and “private ownership rights,” otherwise it’s just a piece of metal. Don’t forget, the GOLD will have to be redeemed for a fiat currency eventually.

  7. Chicken Says:

    Europe should sign up for Putin’s 10yrs @ $25 oil, that’s a pretty pretty good deal, IMO.

    • yraharris Says:

      Chicken–Putin would never give that away —the reason the Soviet Empire collapsed was subsidizing the eastern Europeans with cheap oil as part of the empire—see the work of Kevin J.Mc Carthy

  8. Arthur Says:

    Yra: “How far will the oil prices collapse before the Trump administration realizes the role of Russia in the U.S. economy?”

    Trump: “Good for the consumer, gasoline prices coming down!“

    So?

  9. Rob Syp Says:

    https://www.barrons.com/articles/the-fed-offers-repo-market-50-billion-more-to-ease-rate-pressure-51583784990?mod=hp_LEAD_3

  10. The Black Gold Oil War Says:

    […] “The consensus loser will be the U.S. oil patch as the FRACKERS are carrying huge amounts of debt, which will not be paid while prices sharply decline… There will be talks about a credit crisis as banks and other oil creditors will have to absorb losses and probably restrict lending to other borrowers. Those with private equity investments in the Bakken, Permian and others will be taking inventory on how battered their portfolios will be… Recently, the Trump administration threatened the final leg of Nordstream 2, which would have completed the European dependence on Russian energy exports. President Trump will have to make a decision on whether the U.S. energy sector and some financial institutions are worth the sanctions and meddling in European energy affairs… Putin potentially can be even more disruptive… Under article 5, NATO is obligated to come to the aid of Turkey if tensions mount and a genuine conflict begins. In 1986, oil prices collapsed to $10 a barrel and Vice President George H.W. Bush went to Saudi Arabia to salvage the Texas oil patch by negotiating an end to the Saudi effort to destroy the U.S. oil business. How far will the oil prices collapse before the Trump administration realizes the role of Russia in the U.S. economy?” – Yra Harris […]

  11. Chicken Says:

    Assuming forced liquidations occur, any anticipated effects on PM’s?

  12. Michael Temple Says:

    Chicken
    Those liquidations have occurred.

    Markets are crying for huge policy responses from Fed and Treasury.

    So far, nothing.

    Not clear what they are waiting for. With VIX at 65, the system is broken as FEAR has run amok.

    Watching the USD soar is the last thing the authorities want.

    Get out there and announce QE with an immediate $1 Trillion.

    Start issuing new 10 yrs by the hundreds of billions.

    Enact TARP-like vehicles to buy corporate debt directly from otherwise good companies who need temporary liquidity, rather than let them draw down on their banks or worse, face insolvency

    Time to get creative. While not quite 2008, we are getting close, especially as Covid is here for many weeks to come, Possibly months

  13. The Bigman Says:

    Yra are you still here or have you gone to the bunker?

  14. GreenAB Says:

    Yra, you ok?

    Would like to hear your opinion on my theory: correlation between stocks and Tresuries broke down because the market is realizing that we´re about to face a bailout of giant proportions which will increase debt/GDP levels to unseen levels.

    Over here in Germany the leaders just proposed “unlimited federal credit” to companies by hiking the federal KFW´s credit line by 500 billion. Well, they might need every Euro of that. Vice Chancellor Scholz: “We have enough money. We can help everybody.” Let sink this in…

    I think we´ve seen the lows in yields and will trend up form here, no matter what stocks are doing.

    • yraharris Says:

      Green and Bigman—I am alive and well.Just having to absorb a great deal and I believe we have been on top of this as the blog posts certainly reveal.The present circumstances reveal everything we have discussed for ten years—the central banks have broken the system of global finance and now that there is a genuine fear of deflationary spiral they are throwing everything and then some at the demand shock confronting the world.The nest move is for the FED to allow swap lines with the emerging market central banks to ensure the world is flush with dollars.If the parochial mathematicians could get beyond their models they would see the BCOM and CRB are making decade lows as the world confronts not a supply shock but a demand shock.Commodity producers and emerging market currencies are falling rapidly against the DOLLAR causing more stress for those heavily borrowed in dollars.I don’t want to hear they are hedged because the short vol players created an aura of stability that made hedging an expense not needed—and where interest rates were high the cost of hedging was expensive.The bond market volatility is reflecting the broken signaling mechanism perpetrated by Bernanke et al.

      • TraderB Says:

        I agree that market participants are preparing for potentially MASSIVE stimulus package. However, the stimulus bill passed this evening by Congress appears to be a big Nothing Burger.

        With rates where they are, no one wants treasuries. It is a waste of balance sheet and a huge problem for the dealers. As rates continue to approach the zero bound, the Fed is going to have to buy all of them. Trillions of dollars worth of zero yielding treasuries.

        The Monetary and Fiscal response that will eventually be needed is going to make the financial engineering of 2008 look like a rounding error.

        All we are trading is when that deplorable act of financial socialism will take place. Once we get that all clear, all of the Citadels of the world will BTFD and sell the snot out of risk premium. They will get as much liquidity from the Fed as they need.

        The space ship is nose diving back down to earth. Our only choices are to crash or make a sharp U Turn back to the moon.

  15. The Black Gold Oil War – Precious Hour with TraderStef™ – Author Investor Trader Says:

    […] “The consensus loser will be the U.S. oil patch as the FRACKERS are carrying huge amounts of debt, which will not be paid while prices sharply decline… There will be talks about a credit crisis as banks and other oil creditors will have to absorb losses and probably restrict lending to other borrowers. Those with private equity investments in the Bakken, Permian and others will be taking inventory on how battered their portfolios will be… Recently, the Trump administration threatened the final leg of Nordstream 2, which would have completed the European dependence on Russian energy exports. President Trump will have to make a decision on whether the U.S. energy sector and some financial institutions are worth the sanctions and meddling in European energy affairs… Putin potentially can be even more disruptive… Under article 5, NATO is obligated to come to the aid of Turkey if tensions mount and a genuine conflict begins. In 1986, oil prices collapsed to $10 a barrel and Vice President George H.W. Bush went to Saudi Arabia to salvage the Texas oil patch by negotiating an end to the Saudi effort to destroy the U.S. oil business. How far will the oil prices collapse before the Trump administration realizes the role of Russia in the U.S. economy?” – Yra Harris […]

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