Notes From Underground: Been Down So Long, Looks Like Up To Me

As I reflect on the past eight weeks it seems that Richard Farina’s cult novel title is very apropos. The weekly rise in jobless claims has resulted in even the less informed becoming aware of the possibility of the unemployment rate rising above 20%.

The market knows this will not be sustained as the shelter-in-place orders will end, schools will reopen, restaurants will seat people, nail salons don masks and many other service sector business providers not in bankruptcy will resume operations. But the effects on unemployment will be higher for longer as debt-plagued businesses will turn to automation or just make do with less.

HIGHER FOR LONGER IN THE UNEMPLOYMENT WORLD MEANS LOWER FOR LONGER FOR THE FED. In following the deflation/inflation discussion the average hourly earnings is something to watch because if WAGES actually begin to fall then pressure will build on the FED and Congress to support job creation.

It is a stain on all policymakers that there is no MASSIVE INFRASTRUCTURE PROGRAM IN PLACE that could actually result in worthwhile investment rather than merely throwing liquidity driven money drops. AT ULTRA LOW RATES, NOW IS THE TIME TO FINANCE AIRPORTS, ROADS, BRIDGES and GREEN ENERGY INITIATIVES.

The government is acting like dot com operations as they measure their output by the burn rate of money. The headline data on Friday forecasts 21 million job losses with an expected unemployment rate of 16.5%. This is meaningless except for the sensationalists trying to control the narrative. AHE is expected to increase by 0.3%. That’s the key data point for me.

Thursday’s move in the precious metals already suggests a horrendous data set, which may invoke the Gundlach forecast of negative short-term rates. Be patient. If the data is so horrific that rates go NEGATIVE watch the DOLLAR as an indicator of market sentiment as it OUGHT TO COME UNDER SELLING PRESSURE. Do your technicals to ascertain the lowest risk points on the DOLLAR and precious metals.

Commodities are definitely finding some interest even as emerging market currencies fail to rally. But watch for a change in sentiment with sustained negative U.S. rates. On Sunday we will discuss the German High Court and its impact. Readers have been well prepared for some sort of German response to six years of financial repression.

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23 Responses to “Notes From Underground: Been Down So Long, Looks Like Up To Me”

  1. sally Says:

    wth is AHE Yra ??

    many thanks

  2. andrew perry Says:

    Yra, thanks again for your insights, a question, re AHE this evening, a stronger than expected, might put some pressure on bonds, risk assets, and Gold, and conversely, a weak one adds fuel to negative rates, and great again for Gold?

    • yraharris Says:

      Andrew–great to hear your voice.Yes,you are correct about a stronger AHE but I would give the markets some time–60 minutes or what your time scale of patience is to see market action—after today’s movement a soft AHE may actually experience some profit taking—-I will be watching the DOLLAR on weak data

      • Michael Temple Says:


        AHE truly has nothing to do with USD at this time

        AHE—Average Hourly Earnings

      • yraharris Says:

        Mike–only as it puts going Japanese ,oh I mean sustaining negative rates

  3. Michael Temple Says:

    Very good synthesis of market themes.

    A few comments

    1. I believe the PMs were bid not because of expectations of more labor word, per se.

    Rather, FF futures went NEG for the first time with some 2021 contracts trading at 100.04.
    This led to the drop in UST 2 yr yield towards a record 15 bp.

    2. With Rogoff and others stating that their models indicate R is now NEG 300 bp, that would explain the stubborn resilience of King Dollar.

    As profliigate as Jerome has been, FF futures and 2 yr UST yield is saying he is still too tight. Maybe he simply cannot do NIRP as it would badly hurt the banks. Instead, time to ramp up QE even more. Maybe even kick Mnuchin in the shins to follow the advice of Prof Yra and start devaluing the USD.

    3. Psychologically, Tudo Jones gave a roundabout shout out for gold when he anointed BTC as the best horse to ride in the coming inflation/debasement race.

    I Brook no argument with Me Jones. In fact, I think he is right that BTC has a big run up ahead as the millennials love it and the “float” is easily manipulabke, especially if a few elephants come stampeding.

    Could BTC double from here, back to its highs?
    Why the heck not. But, gold ought to rise at least half of that for similar reasons.

    4. As for silver, I have been down beat on it as the price action shows nobody cares about it as a monetary metal.

    And while I am not about to flip flop based on just today’s one day wonder, I do posit the following.

    Today’s nearly 5% rise was most likely NOT because industrial users decided to stock up on their inventories. To me, likely some “hot money” came in, thinking that if BTC is about to fly on the back of Tudor Jones, maybe some silver is cheap enough to take a “Bitcoin” flyer.

    If BTC takes flight towards doubling by year end, I think a similar doubling in 2H 2020 could occur for silver.

    In conclusion, NEG interest rates did take place today in the FF futures pit.

    Rule of thumb in the “old” days was the UST 2 yr should yield roughly 50 bp above FF.

    So, 2 yr at 15 bp would imply FF should already be at NEG 35. Again, Powell is loathe to go down that formal rabbit hole
    But, it doesn’t mean that the secondary market will not boldly go where no man (American) has gone before.

    This is why I think gold blasted off today, despite a continued RISK ON rally in overall markets.

    • Michael Temple Says:


      R is apparently closer to NEG 100, not 300, presently.
      Rogoff and others think it needs to go to NEG 300

      But, it would still imply at least another $2-3T in QE to arrive at NEG 100.

      And NEG 300 implies another 5ish T in QE which gets very close to Morgan Stanley prediction that FED balance sheet hits $12T by year end.

      S&P might just hit new highs. But, so too will gold climb to new heights. And Tudor Jones may become the next BTC billionaire.

      • The Bigman Says:

        Hi Mike I assume that R is the real rate of return If March PCE is now 1.3% and a 2 year Treasury is at 0.15% then R is -1.5 or 150 basis points now. What do you Yra and others think of Rogoff’s recommendation for negative rates. He states that if done correctly(of course when was the last time the government did anything correctly), i.e. exempt retail account holders from negative rates, institute measures to prevent cash hoarding etc, then negative rates would obviate the huge insolvency mess that goes with bankruptcies, business failures etc. I have a visceral rejection of negative rates but also the same emotion towards spending trillions that we do not have and creating trillions from thin air. He argues that QE does not work and I think the data supports him and most here agree. Here is his recent op ed:

  4. asherz Says:

    Larry Summers, Paul Krugman and their cohort have been preaching for years that where private investment has been inadequate, government must step up to the plate. Tax cuts and handouts to big business have gone into stock buybacks and not capex. Falling tax revenues and massive budget deficits, going out until who knows when, has to result in a lowering of credit ratings for the US debt and a currency that will lose its lofty status. The markets are still not discounting this scenario, but when the back of the horse’s tail smacks the farmer in the face, the reaction will be swift and harsh,
    Every attempt to push gold down by the large shorts in the Commitment of Traders reports, last for a moment and lost ground is quickly recouped. When the barn door is eventually opened, the horse will be gone.

  5. Arthur Says:

    Power and the Rise and Fall of Nations


  6. Michael Temple Says:

    I fully agree with you.

    I like your horse analogy. Yet, in this digital world in which we live, Mr Tudor Jones quite literally bet on BTC as being the fastest horse in the barn.

    He may actually be right, given the cult-like belief in BTC. On the other hand, we haven’t seen what a cult-like belief in gold looks like.

    I think we will see such a conversion/revival in the early 2020s.

    • Asherz Says:

      The dollar relative to EM currencies is the one eyed king. And Jones as a trader may be right in favoring BTC vs the dollar short term. But long term cryptocurrencies are a cult or a fad. So were tulips.
      On the other hand Gold is not a cult. It is a store of value, it is real money and so defined for 5000 years. It will be the last man standing and Central Bank purchases show they understand this as well.

  7. Michael Temple Says:

    A description and prescription for an incredibly stronger USD.

    I find little fault in the author’s viewpoint, especially if global growth is as bad as he estimates. And if the US is reopening is a dud because too many right-thinking folks continue to exercise proper social distancing, we may soon realize that if you open it, they may not come.

    In the land of the blind, the one-eyed man is king.

    King Kong Dollar, indeed.

    Yet, it is still all incredibly bullish for gold, especially now that German/EU relations have intensified from Key Stone Cops to something approaching High Noon.

    Not sure who Gary Cooper is in this drama.

    • yraharris Says:

      Mike–disagree with the entire premise of iagine how much troble the rest of the world is in—-my respect for some of these analysts is next to nil—it is a nice statement but show me the analysis rather then a cute line

      • Michael Temple Says:

        I enjoy a good argument.

        What do you think the message is that FF futures are flashing NEG and UST 2 year hit 11 bp yield.

        Bond market continues to validate Lacy Hunt.
        If US ain’t growing, especially as 10% normalized unemployment could be the new normal, rest of globe isn’t magically going to grow at anything approaching pre Covid.

        Brent oil is still just barely $30.

        Treasury announced $3T in borrowing. USD barely budged as UST 10s And 30s backed up for a supply concession.

        Once again, a lot of economists insist R is currently NEG 100 and the Fed is, therefore, still too tight.

        USD action is consistent with that. Heck, the frickin huge underperformance of silver to gold is SCREAMING recessionary/deflationary impulses, despite yesterday’s nice rally.

        Heck , gold/silver ratio could drop to 100 from 110ish and it would still be in bear market territory.

        Maybe USD doesn’t soar to extravagant heights, except for a potential Eurozone implosion. But, the bears can’t seem to push it down and the EM world is still in tatters.

        CNY is quietly falling. If China/US tensions really rupture, could we see CNY at 7.50? 8?

        EM currencies get further slammed.

        I think there is a LONG LONG runway before the dollar finally dies. Until then, the Fed is still too tight as evidenced by NEG FF 2021 futures.

        Billions being wagered in that market. Far more weight than anything the analysts predict, although I do agree with most of the Rabobank analysis.

        Idiosyncratically, however, Mexican peso could be a “buy” if/when US begins to bring back its global supply chain to NAmerica.

        Under USMCA, Mexico is practically the 51st state.


  8. yraharris Says:

    Mike–the FED has much to do about the 2 year and the aprt about Mexico I agree with as it is where the supply lines are going to be shifted to–especially with a Peso /Usd at 23.7—huge advantage accruing to mexico and let’s not even discuss distance traveled.The world is a mess but again I will not be in the camp of Dollar positive–but I will be patient in searching for direction.The EURO is now at the critical juncture discussed over the last ten years at NOTES —the rates in the US may be too high which is why i queried about the Taylor rule and where rates would be if we adhered to it–rhetorical question?not so much

    • Michael Temple Says:

      Respectfully, you are wrong.

      The Fed manifestly is NOT influencing this move in 2 yr UST towards 10 BP!!!

      Jerome is stuck at zero on FF and has said NIRP is a fool’s errand. Ergo, it is not he but Mr Market who has nudged late 2020 and 2021 FF futures to NEG.

      That is what dragging USTs yields on 2/3 and now, perhaps, 5s towards Zero.

      On a chart, a break below 30 bp in yield for the 5 year shows a run towards Zero.

      The Fed ain’t much buying the front end of the curve. There is plenty of organic demand.

      I will agree there is some Fee buying/distortion in 10s and 30s. They will also be active in the soon-to-be reincarnated 20 year.

      The financial world got turned UPSIDE down in mid-March as Powell broke all the rules to activate more QE in one month than nearly the entirety of either QE2 or QE3.

      USD has NOT even come close to breaking down

      I agree that its strength is not a virtuous one. It is borne of a world where the Fed is still, believe it or not, too tight for a world still desperately short of dollars.

      EM bonds are being brought to their knees as the worst of the worse plead for Jubilees.

      The drop in value of many of these battered bonds, along with the dramatic rise in corporate restructurings/defaults is quickly ELIMINATING dollars from the system.

      Not sure why you don’t see this as dollar friendly as USDs are literally going up the chimney in a generational conflagration.

      It is also why gold is doing so well. It is that perfect asset whose flip side is not somebody else’s liability.

      I do NOT like the long term USD fundamentals.

      But for now, I don’t see the proof in the MARKETS that the dollar is failing.

      Stocks have been on a huge RISK ON rally for weeks, signalling optimism about growth and rebound.

      Yet neither USTs nor USDs will give ground.

      If UST yields were rising steadily, I might be persuaded to consider more strongly the bear case for USD.

      I simply don’t see it in the markets.


  9. Lester Strong Says:

    Was todays AHE an anomaly?……

    • yraharris Says:

      Lester—yes I believe so and will comment in depth on Sunday but it is a very good question

  10. asherz Says:

    I think the answer is that the lowest wage earners entered the unemployment roles leaving higher paying jobs in the AHE statistic. An outlier.

    • yraharris Says:

      Asherz–as usual ahead of my Sunday post.That is what the Liscio report also noted so now May becomes a very serious issue for the FED in terms of AHE-

  11. Reid Says:

    Thank you, Yra. Liked your comment “Be patient. If the data is so horrific that rates go NEGATIVE watch the DOLLAR as an indicator of market sentiment as it OUGHT TO COME UNDER SELLING PRESSURE.”

    Regardless of where rates are going and the unprecedented QE initiatives to support a weaker USD or the counter that the USD will appreciate as some argue that it is a safe haven. The bottom line is the move of the USD in the coming days/weeks/months is going to be driven by geopolitics to support the U.S. recovery.

    As one could argue that the U.S. wants the USD to depreciate to increase U.S. exports and therefore increase the bottom line of U.S. corporations. In addition, countries that hold debt in USD would also be in favor of a weaker USD.

    Furtheremore, this is one reason why China wants to execute a trade agreement with the U.S. As a weaker USD may decrease the U.S. trade deficit. In addition to the recent publicise threat of the U.S. not relying as much on China’s supply chain.

    That said, be on the look out for the U.S. to make statements that the USD is overvalued and gossip on how countries are manipulating their currencies. In return this will support/initiate the depreciation of the USD to benefit the U.S. economy.

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