Notes From Underground: Myopic Gibberish

The Tweeter-in-Chief on Tuesday was pushing on a string as he called for NEGATIVE INTEREST RATES (again). The Federal Reserve is also debating in public the idea of negative interest rates and seemed to believe there are better tools to be utilizing than rates below zero.

Last week Peter Boockvar wrote a piece titled, “The Idiocy of NIRP.” Peter does enumerated his NINE downsides to a NIRP policy:

  1. It’s a tax on bank capital;
  2. It would blow up the nearly $5 trillion money-market industry;
  3. A damage to bank profits (as we have seen), which is insane as the FED/Treasury is expending so much capital trying to sustain banks in the throws of  loan forebearance;
  4. Europe has shown this is a poor idea to keep money in the banking system;
  5. It damages insurance companies and pensions. So if pensions are bankrupt we are going to have to write the bailout check;
  6. Crushes the saver and retiree;
  7. Expands the ever increasing bubble in sovereign bonds;
  8. Further destroys the signaling mechanism of the bond markets; and
  9. The Swedish Riksbank saw the error of its ways and raised it benchmark rate back to zero.

According to Ben Bernanke, Janet Yellen and Jerome Powell, these are all complaints about the effects on a FEW when the FED has the job of securing the entire economy. But Peter’s point about the damage involved will result in a feedback loop in which the FED/TREASURY will have to underwrite the losses that result anyway. There is no free lunch.


In regards to Switzerland and the Swiss National Bank, there were several interviews with the SNB Chairman Thomas Jordan over the weekend. The SNB has the lowest official rates (-75 basis points) and yet the Swiss franc continues to hold its value versus the dollar, as well as the euro.

Jordan noted that while the bank could lower rates more it prefers to remain “active in the foreign exchange markets to reduce the pressure on the Swiss franc. The appreciation on the franc as a safe haven has become enormous. Without the SNB’s monetary policy we would see a completely different franc exchange rate in the current situation.”

This is relevant to the Fed and the White House for it begs the question: Why push for negative interest rates? What would be the desired outcome? If it is to weaken the DOLLAR, better to follow the Swiss paradigm even if it verges on the legality of the Federal Reserve Act. The FED has supposedly begun purchasing corporate bonds so it is already stretching its legal position. Jordan also acknowledged that the SNB had no plans to increase its gold holdings of 1040 tons of the precious metal.

***In the German/European battle of the courts we need to hear from Chancellor Merkel and, more importantly, from Wolfgang Schaeuble. While Merkel has been somewhat conciliatory in the immediacy of the German High Court decision more needs to be heard as the politics of this situation could propel the AfD into even greater power. Herr Schaeuble is the President of the Bundestag and sets the legislative agenda.

If the European Court of Justice (ECJ) attacks the right of Germany to set its fiscal policy in “proportion” to what it deems domestically necessary look for Schaeuble to be the guiding force. He is a hard-money advocate and traditionally fiscally very conservative. It is Merkel and Schaeuble, while all the others are mere myopic gibberish staking out a position of self-interest (except for ECB President Christine Lagarde). Build that balance sheet you wise OWL.

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15 Responses to “Notes From Underground: Myopic Gibberish”

  1. Michael Temple Says:


    Man proposes, but God disposes.

    As it applies to our little drama

    Jerome proposes, but the market disposes.

    I think you overlook how mighty the market is and how impotent the Fed will be in this battle of deflationary forces.

    As we all well know, while Powell was tightening in late 2018, the then RED EDs rallied in the face of the tightening and were spot on.

    Today, front end UST yield curve has already flirted with NEG rates, despite the Fed’s protestations that it will never go NEG.

    If stocks have just a summer pullback/swoon (NOT a crash), watch as T-Bill yields go NEG again.

    Wouldn’t be the first time the markets were ahead of the Fed.

    Fed may NOT choose to follow the markets down the rabbit hole of NIRP. Instead, they may commit to yield curve capping that takes the Fed balance sheet well well north of $10 Trillion.

    I believe that roughly $2.5 Trillion of QE equates to approximately 100 bp of easing….So, the Fed could go “NEG” by doing trillions more of QE.

    So, while I agree with you that Powell may not actually take FF to NEG, things could get just as tough/ugly if the Market does it for him.

    Again, Man proposes, but God disposes.

    In this case, Mammon is insatiable.

  2. A.M. Look 5/15/19 | Says:

    […] […]

  3. Financial Repression Authority Says:

    […] LINK HERE to the commentary […]

  4. Arthur Says:

    I want a strong single currency; and more integration, rather than less, said Angela Merkel. However, Merkel is gone in 2021…

    • Michael Temple Says:


      IMO, you can drive a Mack truck in between the two opposing positions of the GCC and the EVJ.

      Merkel may want a more integrated Europe, but that MEANS mutualized debt , a huge Rubicon for Germans to cross.

      While she hopes for more integration, speculation is beginning to grow that Italy may impose capital controls soon to address currency flight out of her banking system.

      If that were to happen, all bets are off. No more would talk center around further integration.

      No.. Europe will not pass “Go” and collect $200.

      Instead, talks will begin to settle up the ledger as the Euro disintegrates/implodes.

  5. Pierre C. Says:

    In my “not so relevant” opinion, we should revisit the Rotten Heart of Europe. In order to once settle the arguement of HOW the Euro breaks. If my memory serves me correctly the weak link in the ERM was either Spain or Portugal that fell out first.
    Either way, I think I will take the book down from the bookcase and crack it open tonight.
    We are bound to go back into the future soon enough.
    Btw the French and German elite, also had a big stake in ERM back then, as they do now in the Euro working.

  6. Michael Temple Says:

    Meanwhile, USD bears should take note again that DXY is stubbornly above 100 again today.

    The following piece makes a very good point that Trump’s trade war actions towards China threaten even more turmoil for EM if CNY weakens.

    Fed is seemingly unable/unwilling at this time to make it rain Dollars to slake the thirst of so many international debtors.

    And yet, gold has a very solid bid.

    Perhaps folks getting rattled by the big slide again in banks and all
    travel related stocks as airlines making new 52 week lows.

    And, if you didn’t catch it, Danny Meyer of Shake Shack fame has said he will keep closed his sit down restaurants until a vaccine is developed, even if it means waiting until 2021/22.

    Says he cannot operate profitably at 50% capacity and nor does he want to do business in such “suboptimal” settings.

    I don’t want to venture into politics, as Yra has warned us off from doing so.

    But, this is not a political post. Instead, this administration is woefully blind to the reality that virtually all workers and members of society want the same access to “easy” and DAILY testing that the WH enjoys so that they can more readily be at ease to go back out into the economy and society.

    Instead, the administration chooses NOT to make this a federal priority, fobbing it off to the states.

    Stupid is as stupid does. We will never get to rapid daily testing as fast under 50 different state programs than if the Federal government
    threw its might behind invoking DPA and ordering the mass manufacturing of test kits pronto.

    Thankfully, we no longer seem to need masks and ventilators STAT.

    What is my point? We are going to get the worst of both worlds this coming summer.

    Continued social health crisis as Covid continues to simmer and boil, even if no more NYC outbreaks.

    This will continue to keep the economy operating way below capacity. And yet those parts of the economy that do reopen, broken
    and shattered supply chains will continue to inflict higher prices in all manner of niche markets.

    Price increases to date include

    Yeast (up 600%)
    Industrial CO2 (up 25%)
    Steel (Nucor and X putting through $50/ton increases, roughly 9%)
    Grocery Inflation, led by meat and pork

  7. msvceo Says:

    Friends of Yra,

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    Be sure to put “Friend of Yra” in the memo.

    Thanks and hope to see you on the call tomorrow!

  8. Arthur Says:

    The corporate bond market appears dangerously complacent about the zombie threat (13D Research)

    • The Bigman Says:

      Given these data, I have to accept the fact that negative interest rates are a given There is no other way to avoid Armageddon. Ken Rogoff outlines the arguments 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 would agree further QE is not the answer

      Where are the best places to invest in a negative rate environ?

      • Michael Temple Says:

        Places to invest in a world of Negative Rates

        1. 10 yr/30 yr USTs
        2. Super Growth Stocks….Amazon et al
        3. Bitcoin
        4. Gold
        5. Silver–A derivative of gold

        I am still not sure the Fed adopts NIRP any time soon To me, the first step BEFORE actual NIRP by Powell will likely be yield curve capping operations, which will surely benefit UST 10 yr/30 yrs. Gold, too.

      • The Bigman Says:

        Mike do you own bitcoin and if so which vehicle do you use?

      • Michael Temple Says:

        I do NOT own Bitcoin…As to the best way of “holding” it, I would defer to others.

        Personally, I think you would want to hold your BTC in a cold storage wallet OFFLINE.

        I am still old school….I prefer the PMs, especially levered plays

        I have a lot more faith in the 2500+ year history of gold than the 11 year old standing of BTC.

        Some have made a fortune with BTC, and would that I could turn back the clock to the early days of BTC.

        I could never get comfortable owning much more than a few percent of my portfolio in BTC, as it could still not prove out.

        On the other hand, I think gold screams to unimaginable heights by the mid 2020s. Silver, too.

        Best of luck to you, Bigman

  9. Michael Temple Says:

    Nice link.

    However, the next “Lehman” does not lurk in US corporate credit.

    Yes, corporate defaults will continue to be a drag on the US economy and markets.

    But, the Fed will simply keep going and going and going on QE for years to come

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