Notes From Underground: Three Cheers for Christine Lagarde

While the rate cutters were busy dumping on ECB President Christine Lagarde for not cutting and only announcing an increase in bond purchases I opined that Lagarde was getting more by doing less. Lagarde did not go down the Draghi route and lock up with Jens Weidmann and the Fiscal Austerians in the Hanseatic League. The ECB president played for a bigger prize and tonight she delivered with an announced 750 billion euro bond buying program of both public and private issues.

More importantly, Lagarde is going to get a massive fiscal stimulus program, which will probably be financed with the first EUROBOND of very significance size. This is critical and we will probably see a full-fledged banking union with something similar to the U.S. FDIC program. This is the the dual mandate Lagarde was looking to fulfill and by staying humble she has seized the initiative from all the passive observers wondering what to do in an effort of whatever it takes. Say goodbye to the CAPITAL KEY, which has, by law, guided the bond purchases of the ECB.

This demand shock crisis is rapidly developing into the onset of a deflationary spiral and all without a world on a GOLD STANDARD. The massive debt buildup that supported the global financial edifice of overvalued asset prices is trembling resulting in financial fear. Lagarde is trying to provide relief in order to buy time for the world to develop a rational strategy to ameliorate the economic consequences of too much debt. The FED has turned on the spigots but it is failing badly as the DOLLAR has rallied in the face of every FED action.

NOTES FROM UNDERGROUND has been pounding the table for weeks on the need of the FED to open SWAP LINES not just to the world’s key central banks but most importantly to the world’s emerging market central banks because of their huge DOLLAR liabilities brought about by the U.S. central bank’s aggressive low interest-rate policy. On Thursday the Fed finally announced an expansion of the swap lines to nine other central banks.

Next, Treasury Secretary Mnuchin needs to make a deal with the Russians to cut OIL PRODUCTION in exchange for the U.S. ending the worthless sanctions. The drastic drop in oil prices is not helping consumers who are hunkering down and worried about jobs losses due to the DEMAND SHOCK sending businesses into shut-down mode. (Also, note the story from the Wall Street Journal published Thursday about the Trump Administration considering intervening in the Saudi-Russian price war.)

Oil revenues help to lubricate the global system. I believe these two steps will restore some semblance of sanity to a world in the throes of spiritual and financial panic. There is no rational pricing model at work. It is all about access to funding.

***I want to take a moment to acknowledge all of our readers and contributors to the discussion at NOTES FROM UNDERGROUND. Sunday’s post had 60 responses and it is this caliber of discussion that makes the blog such an important source of knowledge and discourse. I implore all readers to go back and scroll through Sunday’s comments.

Be healthy and be humble, Yra

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13 Responses to “Notes From Underground: Three Cheers for Christine Lagarde”

  1. yraharris Says:

    Red alert from Yra—-this old nose is smelling a direct intervention coming from the Treasury to authorize the selling of dollars in an effort to weaken the dollar—–do your work and come up with a game paln based on your risk tolerance levels.The U.S. policymakers have thrown everything at the dollar funding market and yet the dollar continues to strengthen.The old policy book has authorized direct intervention and in this fragile world the G20 OUGHT not be opposed to an effort to coordinate a weakened dollar in an effort to stem the tide of global deflation—I smell a possible weekend maneuver –let us watch the market action for verification.Yesterday,the European debt markets were revealing an ECB action as the BUND was the weakest sovereign issue prior to the announcement–pay close attention for clues for there is little doubt the Treasury wants a weaker dollar

  2. Robert Says:

    Yra – I am a newbie. Does direct intervention mean stocks go down, up or offer stability at current price ranges ?

    • yraharris Says:

      Robert—it OUGHT to help stabilize some of the instability but I am not sure the size it would have to be as we have seen since the FED began by unilaterally cutting rates

  3. asherz Says:

    Yra- A passing remark in your fine piece needs underlining. There is a huge demand for dollars which is in short supply. Why is there such a deficit in the greenback? One of the main answers is OIL. The drop in demand for the black gold (now dross) has shrunk the creation of PETRODOLLARS! This currency came into being in 1974 in a deal with the US and Saudi Arabia to have all oil transactions settled in dollars. This allowed investments to flow into the US. It strengthened the dollar as the reserve currency. This helps explain the anomaly of lowering interest rates here and a booming dollar and finance our trade and fiscal deficits.
    I haven’t seen anyone discussing this. There are other reasons as well (e.g. dollar denominated EM debt).
    Your thoughts?

    • yraharris Says:

      Asherz–you are one day ahead of me—I have discussed this in the White Wave room —-see if Judd and Pax will get you a free intro as a wise senior with major contributions to notes from underground—but you are correct as the oil is a major lubricant of the global financial system as all that liquidity travels the globe supplying what we old people once called petro dollars as you point out—that piece has been simmering in my brain—thanks for bringing it to the fore

  4. Richard H Papp Says:

    Since markets are relatively quiet this AM I thought I would do a gold update. The yellow metal WAS in an ascending channel in my 4 X 12
    point and figure chart (2nd fix) for 16 months or so and this past Monday crashed out the downside after going thru $1520. It found support at $1446. Intraday it had touched the top of the channel a couple of weeks ago but this was not confirmed by the daily RSI, MACD and Slow Stochastic. Ditto for the weekly chart. So, the traders, black boxes and etc. saw this and knew gold was ripe for a downside test.
    To get back inside the channel we need a second fix of $1544 or better.
    It does seem that gold needs a lot of work to rebuild a base and etc.
    I hope this is helpful and lots of gratitude to Yra for his marvelous continued work

  5. GreenAB Says:

    Stay healthy, everyone! Especially the elderly among us!

    I´m getting more worried by the day. Best wishes from Germany.

  6. Pierre Chapuis Says:

    Funny thing is, I was talking to a gentleman today who works on engines of Mega-yatchts.
    I mentioned the yatch that just capsized over in Greece was owned by a Saudi Prince.
    He tells me: “Yea they’re the ones with all the money, them and the Russians ”
    Oil War or Multibillonaire Battle?
    Which one is it.

  7. kevinwaspi Says:

    Sad news on the capsizing of the yacht off the Greek coast, but without saying anything about sadder news of its owner’s location, let me give you some potentially good news. Undoubtedly you’ve heard that a quinine based compound used for 50+ years to treat malaria MAY be effective in combating the current virus. Note that tonic water does not contain the drug, nor does it contain the concentration of quinine that it once did, but, it still contains quinine. THEREFORE, I personally am curtailing the consumption of my usual bourbon and instead (for medicinal purposes of course) increasing exponentially my consumption of tonic water, flavored with gin. Furthermore, without license or credential, am prescribing everyone do the same until further notice. Have a good weekend, and stay safe in all respects.

  8. Michael Temple Says:

    While your nose may be getting that tingling sensation, I think the coordinated action to bring the Dollar down is not on this weekend’s global agenda.

    But, you will be proven right within the weeks to come.

    As for markets, I will say this. The amount of EXTRAORDINARY policy initiatives is simply breathtaking.

    It was just this past Sunday that the Fed went ALL IN with

    A. Slashing FF to Zero
    B. Activating QE of $700 BN
    C. Establishing USD Swap Lines with G-7 Countries
    D. Dropping Discount Rate to 25 BP
    E. Announcing the Dropping of Reserve Requirements
    for thousands of smaller bank to ZERO


    And, yet, it was just the start, believe it or not.

    Since then, in reaction to further plunging stock markets and continued chaos in bond markets and, more critically, funding markets, the Fed EXPANDED even further. The following actions were subsequently taken, in no particular order

    A. Daily RePo Facility was expanded to $1 Trillion!!!
    Good collateral included certain short term Municipal bonds in
    reaction to the blow up in muni land. Fed has now said it will
    provide up to $5 Trillion in overall RePo facilities, if that is what it

    B. Fed activated a guarantee of the Commercial Paper Market
    Yet another $1 Trillion +

    C. Fed accelerated its QE program, purchasing nearly $75 BN just on Friday alone. Total QE in the 2010-2011 period (I believe it
    was QE2) was approximately $600 BN. Fed’s pace last week puts it on pace to replicate that $600 BN in mere weeks, compared to the approximately 10-11 duration of QE2. WEEKS, not MONTHS.

    D. Fed expanded its USD Swap Lines an additional $450 BN by providing liquidity specifically at EM CBs where the dollar shortage appears to be especially acute.

    And, while the Fed took these emergency measures, the Treasury
    swung into action with immediate and bold fiscal measures featuring.

    A. The first MMT drop of roughly $1 Trillion, with rumors that it might go much larger.

    B. Saturday press reports today of another $2 Trillion in fiscal measures. I am not quite sure if that already includes A above.

    C. Treasury has further indicated that it is likely to spend “whatever it takes” to bail out all manner of critical businesses such as the airlines, hotel and hospitality, and municipal transit systems who all face systemic collapse in their revenues. While no precise $$ figure
    has been announced, it seems clear that Treasury will err on the side of being more generous than stingy, unless you are Boeing, who seems to be this crisis’s poster boy candidate to see who most resembles AIG from 2009. Yet, in the end, they probably get some kind of bailout because, for all the sins of their management team with the deadly botching of the Airmax and the egregious wasted share buybacks totalling nearly $100 BN in the past several years, Boeing is still a DEFENSE CONTRACTOR, with nearly $30 BN
    in annual sales to DoD

    D. Further fiscal measures include all sorts of suspensions of debt servicing such as student loans, deferment of 2019 tax filings until July 15th, extended unemployment benefits, and a laundry list of additional relief measures.

    My point? The Fed and Treasury are suddenly “ON THE JOB”
    Even the Germans and UK are on board in a big way, with Merkel
    declaring that Germany will violate its sacrosanct zero deficit law.

    So, while stocks continue to trade with fear and chaos, I am not convinced that Plaza 2.0 happens tomorrow. Policy makers may
    still prefer to see if markets can right themselves after all the EXTRAORDINARY measures taken even AFTER last Sunday’s barrage of Emergency Measures taken by the Fed.

    Perhaps the next 10% leg down in stocks pushes policy makers towards that Dollar Action.

    Whenever we finally defeat Covid and the peak has passed, the amount of stimulus in the markets/economy will produce breathtaking results.

    NOBODY right now is going to complain about the profligacy of our leaders as everybody will gladly take the succor needed now to continue to provide the means for people to somehow scrape by during this dark dark economic collapse. But, on the other side, I think tremendous inflationary consequences will be unleashed.



  9. nserebrenik Says:

    Hello Yra, I sincerely hope that swap lines will be established with the Colombian central Bank so more dollars are available, as devaluation has been brutal on the Colombian peso. I saw in Bloomberg that it’s the hardest hit currency in the world. Inflation is going to be brutal.
    I also want to let you know that I have linked your blog to mine since I believe Notes from the Underground is TOP quality information.


    • yraharris Says:

      NSERE—thanks you for your kind words—Colombia will most probably be a recipient of IMF money in a big way—that is my guess for it isa country that has tried so hard to right its ship of state

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