Notes From Underground: Courting Disaster

Friday’s unemployment report was as bad as forecast and probably worse. Yes, the unemployment rate was not as high as suspected but once the data was analyzed it appears the actual number was close to 20%. The most problematic data point going forward is the AVERAGE HOURLY EARNINGS (AHE). The jobs report revealed a historic 4.7% monthly increase but this was for the worst reason.

The Liscio Report, written by Philippa Dunne and Doug Henwood, was the first to look under the hood:

“Clearly the job losses are concentrated among lower-paid workers, pushing up the average. That mix-effect is visible in two classic low-wage sectors:leisure and hospitality, up 6.8% in April and retail, up 4.4%. By contrast, high-wage sectors like information and finance had increases under 2% — still high by historical standards, but less dramatically so, presumably because so many in those sectors are working from home.”

The Washington Post published a story Sunday noting that 35% of the lowest-earning workers lost jobs, while among the top fifth, 9% did. Removing “all the low numbers from the sample the average jumps.” Next month’s unemployment data puts average hourly earnings at an even greater point for the FED. Chairman Jerome Powell has noted the importance of the pandemic impact on the most newly employed, black and hispanic workers.

This earnings data makes the U.S. central bank’s job tougher as it seeks to ameliorate the impact on the most vulnerable workers. The monetary policy choices are difficult, the political impact is unknown but the longer wage distortions remain, the more influence it will have on the election in the fall.

The White House and Congress will do all they can to try and lessen the negative feedback loop created by shelter in place policies. If AHE continues to befall the most economically vulnerable it will be a long hot summer as the voices of discontent seek redress.

*** The German Constitutional Court ruled that the ECB has stepped beyond its legal bounds through the Public Sector Purchasing Program (PSPP). The court decision is a 90-page document and while many are voicing criticism few have read it. In my opinion, the mainstay of the GCC is that it is challenging the issue of SOVEREIGNTY in the EU. As the German Court and critics noted, are EU treaties to prevail over German law?

The GCC has held that German law holds sway and has given the ECB 90 days to answer the Court’s concerns. Other voices have noted that the ECB will just resist the German Court as the central is not accountable to any single nation but to the European Parliament and the European Court of Justice (ECJ). (See the Financial Times story, “The ECB Is Undeterred By German Court Challenge.”)

Previously, President Christine Lagarde has let it be known that the issue of ECB asset purchases would be a problem and has been pushing for a speedy creation of a EUROBOND and with it an EU-wide banking system with a common insurance pool.

Lagarde pushed but the Germans and Dutch (with a little help from their friends) have blocked the proposals. This decision by the Court should not be a surprise to NOTES FROM UNDERGROUND readers as any student of Bernard Connolly would be aware of the flaws in the EU project. Those criticisms conveyed in the GCC ruling are simply noting the disastrous economic befalling the GCC pulling the plug on ECB policies.

What the critics fail to acknowledge is that the EURO and credit facilities are backed by the German credit card for how else could a Spanish two-year yield -18 basis points, an Italian two-year 64 basis points, and a French two-year -55 basis points. It is the market’s belief in the IMPLICIT guarantee of the ECB balance sheet by the GERMANS. Until critics of the GCC acknowledge this fact all the posturing is narrative bias.

In a Financial Times op-ed piece coming on Monday, titled, “The European Central Bank Is Deluding Itself Over German Court Ruling,” Wolfgang Munchau covers the discussion in a very rational way. Munchau notes that in section 212 of the decision, “the Court states that the lack of a pre-determined exit strategy increases risks.”

This is a criticism that I would place upon all the world’s central banks. But this issue becomes even more critical as it plays into the GCC’s main criticism of the ECB policy:

“The notion of PROPORTIONALITY is particularly central to German constitutional law. It requires government and lawmakersto ensure that policy does not overreach and takes account of the interests of all parties. The Court tends to subject its assessment of proportionality to rigorous tests. But it is in the nature of monetary policy that it has to be disproportionate at times.”

There is much to digest in this ruling but from a market perspective I LOOK FOR Lagarde TO INCREASE THE ECB PSPP at an ever faster rate in an effort to make the German’s ability to exit the EURO economically impossible because the impact on the global financial system will be catastrophic. It would mean a total collapse of the financial system with the DEFLATIONARY COLLAPSE that all institutions are trying to avoid.

Lagarde maintained at her last press conference that “we will not allow fragmentation.” Watch European bond spreads to get a market view of ECB intentions. How much sovereign debt of Italy and others will the ECB have to purchase in order to prevent the fragmentation being imposed by the markets?

***One more piece in courting disaster. The Trump Administration needs to silence the Navarro Doctrine and stop pushing at the Chinese. Threats of not honoring Chinese ownership of Treasuries and other assertions about undermining Chinese global trade deals are ACTS OF WAR (see the 1936 U.S. oil embargo against Japan in an effort to quash Japanese imperial ambitions).

If the White House keeps sustaining the aggressive rhetoric watch for China to assert with ever greater bellicosity about the issue of Taiwan sovereignty. This is not a time to elevate tensions when the world needs cooperation to confront and alleviate the pandemic that is creating so many health and economic problems.


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30 Responses to “Notes From Underground: Courting Disaster”

  1. mikegre2014 Says:

    I think Trump’s China strategy is to get China to honor the terms of the trade agreement, nothing more.

    • yraharris Says:

      Mikegre—with that I have problems for the rhetoric is far too bellicose.Can’t wear those rose colored glasses

  2. Michael Temple Says:

    You posit an extraordinarily dangerous game of thermonuclear “chicken” when you say that Christine will attempt to put Germany into “check” on the chess board by doing precisely what the GCC said is illegal and disproportionate, namely buying up gargantuan amounts of Italian debt using Germany’s credit card.

    Back in 2008, nobody thought Paulson would let Lehman fail after the Bear Stearns debacle and then the conservatorship of FNM and FRE. Too stupid to act that wantonly.

    And then the impossible happened.

    Christine May try to “check” the GCC.

    Don’t rule out a bold countermove whereby GCC/Germany put EU into checkmate and simply wipe all the players off the chess board as Germany bolts the EU.

    McConnell was playing politics when he threw out the red meat trope of suggesting that, perhaps, deadbeat states in need of a federal bailout should declare bankruptcy.

    While he played the boisterous bad cop appealing to his base, Jerome was the good cop who kept buying distressed munis.

    In the GCC vs ECJ, I don’t think the GCC is bluffing or simply playing politics. I think they mean for a “High Noon” moment (terrific movie) in which they intend to shoot Frank Miller dead.

    The GCC ruled 7-1. Damn near unanimous.

    If Christine flaunts their invitation to demonstrate proportionality by going on a BTP buying spree, we could well be headed to Lehman 2.0 on steroids. Thermonuclear wasteland.

    Stocks could drop 10% overnight and gold might leap $300/400/500 in response.

    Because the United States has long accepted and practiced Alexander Hamilton’s federalism and its control of the nation’s purse strings, the Treasury can issue $3T in new debt as it will this quarter. And it can nod inagreement as the Fed ups its balance Sheet to $6T+, on its way to $10T+ as it buys CP, munis, IG and HY debt.

    GCC is telling ECJ/ECB/Brussels that Germany has NEVER turned over its SOVEREIGNTY in these economic matters over to them.

    Germany (and Netherlands) still cling to the original Treaty of Maastricht which enshrined no European debt mutualization.

    Put aside all the legal arguments for a moment.

    What if Germany simply says, “No Mas”

    Keep your Euro, we’re leaving and bringing back our beloved Deutschemark.

    EU supremacy is preserved (just as when Britain left) and Germany takes its lumps on its Target 2 liability and says “Auf Weiderschen”

    Not a non-negligible outcome, if you ask me

    • yraharris Says:

      Mike –none–sorry what happens to the price of european sovereign debt that is owned in massive amounts by banks,pension funds,insurance companies on and on—who absorbs the losses on all that sovereign debt that will be repriced?

  3. Bellino Says:

    Can Lagarde ignore the German court and do as she pleases? In metaphorical terms…as Andrew Jackson ignored the Supreme Court decision that the federal government must send troops to defend the property and lives of Cherokee citizens from forceful removal to beyond the Mississippi. Jackson’s retort to the Supreme Court was ” let the court send its troops, mine will stay in barracks. ” The Trail of Tears was a result and the other was the enrichment of Jackson and friends with Cherokee property. The framers of the European Project screwed the pigs countries of europe making personal fortunes, can they do it twice by screwing the average Herman the German?

    • Michael Temple Says:

      You hit the crux/nub of this conundrum.

      Germany (and Netherlands) have the money while the PIIGs don’t.

      Britain has shown the way. Brexit is fait accompli. Hungary and Poland similarly chafe at certain EU restrictions.

      Germany has already crossed one sacrosanct shibboleth when it overturned its domestic “Schwarz Null” and enacted deficit spending to ail its badly damaged economy and citizens.

      That was a BIG STEP. I am not convinced that Germans will support further plans of profligate ECB purchases of insolvent Italian debt. They will certainly NOT accept the concept of Eurobonds, in my view.

      Somebody wrote very perceptively of Covid this past week. He said this global scourge has accelerated so so many trends that were already in place.

      Death of Bricks and Mortar Retail

      Rise of ECommerce
      Rise of Telecommuting

      Rise of Telemedicine

      Death of 3rd Tier universities that may not survive a year without students

      Possible Pension Reform or Bankruptcy of Woefully underfunded public pension funds

      Etc ETc Etc. Insert your favorite memes.

      I think I might add to the list the likely fall of Italian debt which is simply unsustainable at 150% of GDP and facing at least two years of hellish economic recession/depression.

      Ergo, put me in the camp that says the ECB/EU may not get their way and hoodwink/arm wrestle Germany into being the financial backstop/saviour of Europe.

      As you highlight about Andrew Jackson, “you and whose army” as he stood firm against the Supreme Court.

      How does the EU compel Germany to surrender their wallet, beyond the backdoor Target 2 liabilities of 1Trillion already incurred in the past decade.

      • Bosko Kacarevic Says:


        I’d like to insert an accelerated meme caused by COVID— death of fiat currency and paper gold, and the rise of proprietary gold ownership and cryptos.


      • Michael Temple Says:

        You are certainly in good company with Paul Tudor Jones on that one!

        While the headlines we’re on his choice of Bitcoin as the fastest horse, he sees gold hitting $2400 on the back of this monetary miasma

      • Bosko Kacarevic Says:


        After listening to the John Lipsky interview, wouldn’t you say, every country is backed by the FED’s credit card? Germany and the EU are playing chess on the FED’s chess board. The FED runs the whole game, so check mate, just means there will be a change of players on the board, but the game must go on….


      • Michael Temple Says:

        Fed doesn’t look much beyond 12 miles offshore of our international waters.

        Not this Fed, imo

  4. asherz Says:

    The threat of non-payment of Chinese US Treasuries was quickly walked back. That won’t happen. But Chinese theft of IP and huge balance of trade numbers are going to be a thing of the past. Much production will be shifted here (robots cheaper than Chinese labor) and Mexico.
    As to the threat of States going into bankruptcy and Germany doing a Gexit, that won’t happen either. But the Solomonic solution will be on the same lines. Yes here is the money,,, but lots of strings attached. The receiving end parties will have to take the straight and narrow road. New York, Illinois and California will have to conduct themselves like Texas and Alaska. Italy and Spain will have to adjust their spending habits like some of the Northern nations. And if they can’t or rather won’t, Wile E. Cayote and the Samson Option.
    Who blinks first? Stay tuned.

  5. ShockedToFindGambling Says:

    The EURO is a clever End Run, around the purpose of free floating FX rates.

    The Germans are using most of the other EU countries to hold down the price of the EURO, thereby enabling Germany to increase exports via a EURO, that is much cheaper than a single country D-Mark would be.

    Of course this hurts the peripherals, who would prefer a cheaper currency.

    So in effect, the peripherals are subsidizing Germany.

    Spain, Portugal, Greece, Italy, France must be looking for an exit strategy.

    • Michael Temple Says:

      Not so fast. Those PIIG nations get to suckle at the teat of German largesse/a quiescence to the build up of over 1Trillion in Target 2 liabilities, not to mention the real world interest cost savings of their debt trading at ludicrously tight spreads given their junk-like finances.

      You are far too blase to think that the North and the South can quietly separate without dire financial implosion

      Either way, it is terrible that this debate is even happening at all at such a dire time in world economic history as hundreds of thousands die and millions lice in an economic dystopia that seems to be our lot well into 2021. Lord help us if it lasts into 2022.

      All systems.are only as strong as their weakest link.
      Europe is facing some very weak links.

      2021 might see the Renaissance of the lira and the DM. Wouldn’t be the first currency union to break up.

      • ShockedToFindGambling Says:


        Agree with most of what you said, BUT this is an artificial situation, that I don’t think can last.

        EC Peripheral debt is kind of analogous to the FED buying HYG (junk bond) ETF.

        I think the peripherals are better off with a cheaper currency, and paying realistic market rates on their bonds,

        However, as you say, don’t know how we get there without a crisis.

        On the other hand, we may still be headed for a crisis, even with Germany backing their debt.

        There are 2 sides to artificially low interest rates……….every penny saved by borrowers is lost by investors.

        The artificially low world interest rates have gutted the conservative saver class……and they are (were) the firewall against a recession turning into something worse.

  6. Pierre C Says:

    John Lipsky (Managing director of the IMF from 2006-11) interview.
    “The Fed is now CB to the world.”
    He speaks of 3 tiers of dollar swap lines being provided to the world by the Federal Reserve

  7. Michael Temple Says:


    Sorry, but I did not understand your comment about “none”

    None what?

    As to who will take the losses, it is all the CBs of Europe and ECB as well as gullible private banks.

  8. yraharris Says:

    Mike–the chance of germany leaving for the D-Mark is none.Five years ago I would have said yes—-but now as felix Zulauf is noted by John Maudlin—Germany has been had and I will get to the fact that Chancellor Merkel made it all possible for running interference for Mario Draghi

    • Michael Temple Says:


      NOTHING is impossible any more when it comes to market moves.


      That matters have managed to come to this, a courtroom drama in less than 90 days, is shocking.

      Britain voted to LEAVE Europe by a bare majority.

      On the eve of the election, cable traded at 1.50 before plummeting to the 1.20s afterwards.

      NOBODY thought Trump was going to win in 2016. Heck, even he had prepared a concession speech that night.

      I think it requires a tricky bank shot on the billiard table to finesse keeping Germany on board with Team Euro at this time. I really do.

      You seem to think that Merkel can somehow overturn/manipulate the GCC. I am not so sure about that. I really am not.

      Again, on the eve of the Brexit vote, EVERYBODY thought Britain would REMAIN.

      You are probably one of the few here in the US who is even examining this development out of Germany last week.

      Yet, as you read the European commentary on just what happened, the reports all indicate that this is a HUGE CONFRONTATION that the GCC does not seem inclined to want to back down from.

      The vote was 7-1. You/Zulauf say that the Germans/Merkel have been “played” and are cornered. Before the GCC, I might have agreed .

      But, we are in uncharted waters. The massive bailout required to steady Italy (and likely Spain and Portugal) could dwarf anything seen during the 2011 Euro Crisis.

      Seems rather cavalier to think the Germans are going to roll over and cry “Uncle” and watch the Italians rack up more frequent flier miles on their credit card.

      So far in 2020, we have witnessed 3-sigma events in

      1. Stocks—Down 30ish% in one month
      2. Bond yields and FF rates slashed by 100 and 150 bp, respectively, in the span of weeks.
      3. Oil cratering to NEG $40
      4. Gold/Comex basis blowing out to unheard of $100

      Why is it so hard to imagine that the EUR could suffer a tremendous meltdown as either Italy or Germany possibly exits.

      It’s not as though Britain hasn’t already shown the way.

    • ShockedToFindGambling Says:

      Yra, Germany doesn’t want to leave the EURO, but if we get a serious recession, it will probably implode.

      The peripherals will all be asking the Germans for cash and the theoretical value of a free floating D-Mark vs. a Drachma or French Franc will widen.

      To reflate and devalue their existing debt. the Peripherals and France will believe they need a much cheaper currency, and will probably leave the EURO.

      Alternatively, they could ask the Germans, for cash, bailouts, assumption of their debt, but the number would be so large, that the Germans would have to refuse.

      • Michael Temple Says:


        What do you mean “if” we get a bad recession?

        Right now, the choices look to be either

        A. Bad Recession or

        B. Depression

        The US has already done over $5T in QE and stimulus.

        European Union is nearly as big as US in terms of GDP.

        Germany and Netherlands don’t seem inclined to run up such trillion euro deficits on behalf of their southern friends.

      • ShockedToFindGambling Says:


        I agree with you……bad recession…….but the stock market acts like it’s going to be shallow with a v-shaped recovery.

  9. Arthur Says:

    The fate of the euro (Vanguard). It’s from 2018 but you can update by yourself the probabilities (page 16) after coronavirus.

    • Arthur Says:

      • Michael Temple Says:

        Covid is a huge accelerant of trends already in motion.

        I read an interview in which a credit analyst was asked who might be the Lehman of this crisis.

        He gave a thoughtful answer.

        In his view, the Fed has taken “Lehman” off the table here in the US as levered and “systemically” important companies have been given succor by Fed QE.

        He did, however, think that the best candidate to be this crisis’ Lehman is Italy.

        Overlevered and insolvent as it does not have its own printing press like the US, England or Japan (and many others).

        Covid will ravage the Italian economy well into 2021. Where does Italy get the euros to soldier on?

  10. kevinwaspi Says:

    I agree with you, NOTHING is impossible and NOBODY KNOWS ANYTHING. (Hell, I even have a t-shirt that says, “I don’t know Jack, but Jill is really fun”)
    I never thought Britain would stay.
    I watched the betting houses. On the surface, it looked like Brexit would not pass, but digging deeper, into the SIZE of the bets, the big pound bets were on stay, the larger number of bets with smaller amounts were on leave. One vote per person, but no limit on pounds per bet. Lucky me, I cleaned up on a short GBP/USD position.
    Germany will stay. No one who lived through the Weimar Republic is in power, and very few who did are even alive today. Thinking of Germany as the paragon of thrift is misleading at best.
    The country has received a huge advantage with the Euro that has allowed it to run budget surpluses recently, despite absorbing East Germany and over the past ten years, throwing mega Euros at their version of the green new deal. EVERYONE is a currency manipulator, this is Germany’s tool. For them to return to the DM would be a curse greater than the Swiss Franc/SNB paradox. The result would have the Bundesbank make SNB and BOJ look small in their print & buy game. No, even the conservatives do not want that ‘winner’s curse’. The killer virus has neutered the “animal spirits”. We all cower in our homes, being told to create more unemployment than any measure in economic history…. and we dutifully obey.
    No, Germany will not leave……yet.
    There will be a time, (but it will probably not be Germany), and the Euro is doomed to fail based on it’s two legged stool design. Just don’t spend all your powder betting that it is in the next 88 days.

    • yraharris Says:

      Professor—A+ as a summation .You know I have been in this camp for many moons but as I have maintained via the Bronx Tale analogy and even Felix Zulauf maintains Germany has been duped by the French ,Draghi and most importantly Merkel

  11. Arthur Says:

    1) We should talk in terms of probabilities, not certainties
    2) Expect the unexpected, last 20 yrs: 11S, Obama, financial crisis, euro, Catalan’s independence referendum, Brexit, Trump, Chicago Cubs, coronavirus, gold and oil price, …
    3) Timing is everything
    4) Emotion eats logic for breakfast
    5) It’s your biases that kill you

    Coronavirus: Is Europe losing Italy?

  12. Michael Temple Says:

    Yes, probabilities, not certainties.

    However, I am curious. Are you agreeing that the Euro/EU could possibly implode some time soon?

    Or are you saying that our biases are wrong and that the Italy/Germany developments are nothing new and that the EU will
    muddle along?

    The article you posted suggests Trouble (with a capital “T”) ahead as Italians sour on the EU almost. They sound as despondent about Brussels as the German Court sounds defiant against the same.

  13. Arthur Says:

    Michael, I agree with both statements. Including coronavirus effects in my assessment, at least one country could leave the euro in the next 5 yrs (30%) and kicking the can down the road (70%).

    If the probability goes from 20% to 30%, many people then think it won’t happen… that’s huge mistake.

    Same probabilities were with Trump/Hillary. I only know two people who understood Trump’s victory… Scott Adams and Peter Thiel.

    I’m writing from the middle of nowhere in Andalusia (Spain). And the panorama is pretty ugly, worst than in 2008 & Co.

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