In the past six months, NOTES FROM UNDERGROUND has always been more podcast than blog posts so it’s a very good time to review and put the markets into perspective are as we approach 2021. NOTES has been on the bearish side of the DOLLAR trade since Wolfgang Schaeuble — the purveyor of the German NEIN and infamous Schwarz NULL (black zero) — pivoted and promoted a large grant program to help the severely impacted European economies suffering from COVID and a massive debt burden. As Schaeuble suggested, giving more loans was similar to giving the debt plagued nations ROCKS, weighing them down ever more, while giving large GRANTS was similar to providing BREAD.
The DOLLAR has fallen to support levels several times only to rally and many analysts have suggested that the DOLLAR would rally for the remainder of the year as investors sought a haven. Gold has been declared a safe haven along with BITCOIN, the YEN has served in that role as of course has the Swiss franc. But this question remains: Can a nation with the burden/privilege of a reserve currency be so cavalier about its fiduciary responsibility in protecting the currency’s usefulness as a store of VALUE?
If the answer is not an unequivocal NO then its status as a HAVEN begins to be questioned. Interestingly, this week Valery Giscard d’Estaing at 94 years of age. It was d’Estaing and Jacques Reuff, his key advisor, who called the U.S. imperial policies financed by the reserve status of the U.S. dollar, an exorbitant PRIVILEGE.
In order to be a reserve currency you must provide the responsible policies of a systemic FIDUCIARY for a currency is a STORE OF VALUE, as well as a means of exchange. I am in NO WAY suggesting that the DOLLAR’S RESERVE STATUS IS UNDER THREAT AT THE MOMENT but the market is demanding responsible policies, both monetary and fiscal. This is what makes the selection of Janet Yellen as Treasury Secretary a powerful choice. It combines high level financing knowledge with understanding the fiscal needs of COVID and infrastructure upgrades. In other words, she understands the need to move from stimulating demand to making infrastructure investment the backbone of Biden’s response to elevated unemployment.
The current DOLLAR weakness represents the market’s fears about an exploding budget deficit financed with FED largess in an effort to keep long duration yields lower for longer in an effort to finance the proverbial guns and butter. Some Republicans insist that the PARTY return to fiscal austerity but as Schaeubel has suggested it is no time to become austere when jobs are scarce, wages soft and people are suffering.
If the Republicans revert to the PARTY OF NO they will be in the “wilderness” for many years to come. TED CRUZ and company gave the Trump administration every DIME it desired and then some, incurring TRILLION-DOLLAR deficits even in a FULL-EMPLOYMENT economy. Doing times of severe economic pain it is no time to seek fiscal responsibility. NO IN THE TIME OF COVID WILL BE A POLITICAL DISASTER.
***CRITICAL LEVEL ALERT: In January 2015 the SWISS NATIONAL BANK pulled the PLUG on the EUR/CHF PEG, sending the Swiss franc soaring. This was predicted in several posts here at Notes From Underground weeks before the event resulting in major profits for those currency traders who followed our musings. The week of the SNB action resulted in a trading range of 1.0241 to 0.7360.
The following week saw the markets calm as the range was 0.8840-0.8502 with the weekly close at 0.8803. This week we have seen a dollar/Swiss low of 0.8891 so getting close to a major market action critical low. This has resulted in a huge move in the FRANC even as the SNB is printing large amounts of its currency in an effort to STEM its appreciation.
We refer to the SWISS as the greatest ALCHEMISTS of all time as it prints currency and uses it to buy baskets of global equities. Over the last five years, the SNB has become one of the major shareholders in stocks such as APPLE. The Swiss central bank is a hedge fund with its own printing press. Look for the SNB to get aggressive in an effort to halt the rise in the FRANC. Again, interesting times and the value of the Swiss franc is certainly a reflection of the madness.
***One last thing. In March, NOTES FROM UNDERGROUND put out a call to raise money for the Santa Mike project to feed and clothe the homeless. You, dear readers stepped up as the ravages of covid caused the food banks to be emptied. I can’t thank you enough for your efforts, which raised nearly $50,000 in cash. The donations purchased SEMI-TRAILERS full of necessities meeting the caloric needs of many who never showed up in search of need.
I’ve linked an article from the Chicago Sun Times featuring the good works of my friend MIKE STURCH (aka Santa Mike). Covid has kept the needs great as pictures even from around the country show lines of cars waiting to pick up basic food items. During the season of giving any effort to lend a hand to the Sisters of St. Vincent DePaul would be greatly appreciated during these difficult times. Thanks to everyone for indulging me and Santa Mike will post his address in a link to this post later. Thanks for any and all help — Yra
Tags: EUR/CHF peg, Janet Yellen, safe haven, Santa Mike, SNB, U.S. Dollar, Wolfgang Schaeuble
December 3, 2020 at 10:01 pm |
Yra
As always, you write cogently. However, I think you gloss over a tremendously important inflection point which occurred on “Pfizer Monday” and then the next “Moderna Monday.”
You write
The current DOLLAR weakness represents the market’s fears about an exploding budget deficit financed with FED largess in an effort to keep long duration yields lower for longer in an effort to finance the proverbial guns and butter
While that is true, it misses, imo, the bigger tectonic shaking in markets when Pfizer announced an “unheard” of 94% efficacious vaccine.
Instantaneously, STOCKS SOARED, BONDs and GOLD DUMPED, and the USD weakened.
Made eminent sense as a pick up in 2021 economy was now “guaranteed”. Along with that, commodities caught a bid and EM inflows increased.
Wall Street is now touting steel stocks and basic materials as supply constraints will finally make themselves felt across a wide swath of industries as business picks up and suppliers simply cannot keep up with the demand.
So, inflation/reflation got baked back into the cake on Pfizer Monday and that meme has NOT gone away.
Exploding budget deficits will only exacerbate bond market woes as the Fed will be called upon to absorb even more supply as private demand (esp foreign) withers.
As bond yields ride higher, the Fed will be left to become the “son of BOJ” and own the damn curve because nobody else will want em.
Jeffrey Gundlach is not stepping up to the plate at these 10 yr yields.
And the entire 50/40 crowd will begin to wonder why they hold 40 in bonds while they melt away in 2021. Imagine a tactical reallocation
to 65 stocks, 25 bonds, and 10% real assets.
With the global economy coming out of Covid by 2H 2021, and perhaps even earlier, economic activity will further undercut DXY demand.
Do folks realize that Mexican peso is north below 20 and its stock market is up the same as the S&P since the March low?
USD has a date with destiny at much lower values in the year ahead.
Almost impossible for it not to happen, especially when you simply realize that stocks continue to price in such a “brave new world”
Not the end of the markets. Although high flying FANGs and stay at home tech companies may get re-rated lower, especially if UST 10 year yields break well above 1%. Remember, it was late February/early March and UST 10 yr yields were solidly above 1.5% before the Pandemic.
A 10 yr sub 1% seems only possible with a whole lot more “rowing” by Jerome and the Gang. YCC will become reality in Q1 2021 as bond yields explode higher.
Mike
December 4, 2020 at 6:22 am |
Yra, i love listening to your podcasts. Lots of good back and forth discussion. I’m just surprised that you are like so many others getting ahead of themselves on the next administration. I doubt Joe Biden will get anywhere near the White House and Janet Yellen will end up just being a distant memory.
December 4, 2020 at 7:57 am |
[…] LINK HERE to the Article […]
December 4, 2020 at 10:26 am |
Yra, THANK YOU so much for your Friendship & Posts !! Your participation is so much appreciated !! Thanks again.. Santa Mike… my phone # is 312-402-0355
December 4, 2020 at 12:29 pm |
Mike–this is a great honor and pleasure to be able to help with—all the best to Sister Katie who is in charge of the entire realm of ST.Vincent DePaul feeding and clothing those in such great need