At the beginning of the week, the COVID DELTA VARIANT was the major concern as the weekend brought news of a widespread increase. It seemed world financial markets were in the throes of concern of another pandemic lockdown with the Olympics being cancelled. We at NOTES FROM UNDERGROUND offered context and stressed that the zero interest-rate markets would provide a far different backdrop than what occurred in March 2020. We did learn that zero interest rates lowered inflation concerns and the Olympics are still taking place, although to empty stadiums. SO THE BULL MARKET MUST GO ON.
Even the reversal in the major bond market rally couldn’t put a halt to investors’ desire for equities as the second quarter earnings provided greater lust for the rocketing stock prices. The realm of zero interest rates — and for certain negative real yields — promote the desire for potential growth stories, as well as dividends paying more then the yield on a 10-year Treasury note (h/t John Authers).
Thus we are anticipating an ALL-TIME weekly high in the SPOOS at Friday’s close unless people sell for fear of more bad news on the DELTA VARIANT over the weekend. Also, for all of those proclaiming the end of REFLATION, it is curious that the Bloomberg Commodity Index is closing in on its highest weekly close in six years. This is in spite of the large drop in all commodity prices on Monday as the pandemic outbreaks led to panic selling. Zero interest rate policy has significant impact until it doesn’t.
The key news of the week occurred Thursday as the ECB held firm to its asset purchase program while keeping its deposit rate at NEGATIVE 50 BASIS POINTS. Also, the Pandemic Emergency Purchase Program will continue until its target of March 2022. President Christine Lagarde’s press conference was a dovish as ever , and I think made life very difficult for the FED.
Lagarde made a statement in her opening remarks that revealed what many investors have long thought. She said (and I am paraphrasing): So much debt has been taken on by households and firms that any downturn caused by ECB being impatient in sustaining rates and asset purchases could lead to financial instability. Any quick downturn can threaten the financial situation of various economic actors.
This is it. They can’t raise rates too soon because there’s too much debt, which has been supported by massive asset purchases instituted by all the world’s major central banks.
The ECB President maintained many times that the central bank will have a steady hand and the Governing Council has a great deal of flexibility when it comes to changing its current policy. Lagarde put Fed Chair Jerome Powell in a very difficult situation for if the FED moves before the ECB and BOJ it will put upward pressure on the DOLLAR, creating deflationary problems for emerging markets and commodity exporting countries. The massive amount of DOLLAR DEBT overhang in the emerging private sector economies will put huge pressure on those debtors to raise greenbacks.
This was the concern in March 2020 and with the emerging debt numbers at $12 trillion or more, makes the entire global financial system fragile by its reliance on dollar funding. The important areas to watch are the GOLD versus various currencies if the market comes to this realization. The equity and European bond markets seemed to accept the increased probability of this outcome.
One more thing: As I watched Lagarde’s press conference, it appeared through body and language that she was highly agitated by the dissension in today’s ECB meeting. Several members of the media pressed when President Lagarde maintained that all ECB members were “directionally on the same page.” When asked about possible dissenters she said that the journalists should do their jobs and question the outliers.
A few hours after the press conference both Bloomberg and the Financial Times ran headlines about far more dissent taking place in terms of ECB forward guidance practices. The FT’s headline, “ECB Divisions Open Up Over Pledge to Persist With Negative Rates.” Well, the ECB will be on vacation and not meet until mid-September. It appears a cooling-off period is needed but be alert to the dissenters providing the media with all types of content. I’m looking at German central banker Jens Weidmann, Dutch banker Klaas Knot and Belgium’s Pierre Wunsch.
Lagarde staked out her position and in a final punch proclaimed the success of her own counterfactual: “We saved the EU by doing what we have done: we safeguarded the community.” This was never going like watching paint dry or to note Peter Boockvar’s quantitative tightening analysis that it would not be on auto-pilot. Enjoy August as September brings the German elections.
Tags: central banks, Christine Lagarde, Debt, ECB, European Central Bank, SPS
July 23, 2021 at 1:46 am |
I don’t really follow what you are saying on gold. Does a dollar squeeze ( dollar funding crisis) would be bearish for gold or the inability of the FED to raise rates would be inflationary and thus bullish for gold?
July 23, 2021 at 7:20 am |
Carlos—I am bullish GOLD against the currencies.This has been a very consistent theme for 11 years at this BLOG although if you read archives of NOTES there are many times shorting gold is suggested—as we continue to maintain—we trade and invest to make money and are dynamic and not static in thought—what Lagarde said yesterday was that the central banks are caught in a debt trap of their own making for how to you cover the costs of so much debt as rates at some point HAVE to rise—if there is a DOLLAR squeeze then GOLD will initially fall and watch to see how the FED and others react to create the needed dollars.Last year we saw this when the DOLLAR rose dramatically in March/april of 2020—this BLOG called for the FOMC to increase dollar swap lines and cut rates to ease pressure which the FOMC did a few weeks later thus the FED’s reaction helped the Dollar to drop and GOLD to rally from a massive break due to a global fear of deflation—so it was the reaction that was critical–the Fed’s reaction—now with so many reserves created and interest rates at zero what tools remain in the BOX in an effort to respond—this week was a good test as markets steadied as rates provide a great support and don’t think the FED didn’t notice that we are back on equity market highs and not aa peep from the FOMC—wall street applauds lower for longer as the FED will be reticent to raise rates and pull the most powerful support out from under the markets and in their mind the economy—it is the response to the potential dollar funding crisis that is critical—-hope this helps and as always risk only to your level of tolerance and be dynamic in your trading.As Louis Gave says so beautifully—“my clients don’t pay me to forecast but to adapt.”
July 23, 2021 at 2:21 am |
Great resume of the state of our markets Yra… whatever there is left of them.
There are no more markets,,,just interventions. Lagarde reaffirmed that in regard to the bond market and yields.
Precious metals cannot be allowed to rise if fiat currencies are to retain their credibility. Equity markets? Monday the Dow was down 700. The dreaded DELTA. Tuesday it was up 600. I guess variants don’t matter.
PRICE DISCOVERY HAS BEEN LONG GONE. Long live our central bankers. Capitalism was good while it lasted. Adam Smith, thanks for the memories.
July 23, 2021 at 3:15 am |
It’s becoming increasingly difficult to feign insolvency much more with the negative real interest rates, unprecedented deficits, soaring government debtloads and rapidly worsening CB balance sheets.
Gradual but accelerating currency destruction is the only politically-acceptable relief valve available (along with the financial & political repression required of currency destruction) as policymakers try to pretend and extend. The alternatives are hard defaults of debt and spending/entitlements, which would crash markets, cause a depression and stoke civil unrest. History is our guide. It repeats or rhymes because human nature doesn’t change.
Everyone knows successful investing often requires patience, even unbearable patience. Precious metals and their stocks are testing that patience like no other, but the reward will come in view of the above and it’ll be big. If anyone believes differently, please explain.
July 23, 2021 at 8:14 am
I for one am puzzled about the whole gold narrative, because in order for gold to reach unthinkable highs, the financial system and confidence in government must collapse, correct? Therefore, if there is no trust in the banking system, how does one actually realize their wealth created by the extremely high gold price? Sell the gold to a farmer for chicken or land? Will we go back to the barter system? Will it become gold trading in dark alley’s with mafia style risk? A $50,000 price in gold will mean serious civil unrest and economic crisis. $50K in gold will be at the expense of a civilized society, will it not? Was the USA not under a gold standard before the crash of 1929? I don’t know how, but I think a $100 gold price would reflect a much better future for my young family?
There is no question that gold is a perfect weight of measure for a unit of account, or money, based on its atomic structure, but that only matters under a sound economic system built on trust, law and order and free markets, otherwise the physical economy will be uncivilized. We might even be there already with COVID lockdowns and masks. Who would have thought the entire planet would be wearing masks to go outside?
Currency destruction and finincial repression is baked in the cake, but I don’t see how balancing the global debt system with $50K or $100K in gold would be a civilized solution? I really hope someone finds another way?
July 24, 2021 at 7:56 am
Bosko, I meant to be focused on destructive policy, not the gold narrative as you described it. I mentioned precious metals only in reply to Asherz and because it may offer us protection.
If gold soars that much, and I didn’t mean to imply it necessarily would, then I think that’s merely a symptom of the problem; not the actual problme.
As to whether or not a gold rebalancing is a “civilized solution”, where one stands probably depends on where one sits. There are always winners and losers in market changes. Many consider the status quo to not be very “civilized” because the US is abusing its global reserve status via soft-defaulting on the UST reserve asset and by weaponizing the dollar; I imagine that people and countries on the losing end of that who happen to also hold much of the world’s gold (eg, “goldbugs”, China, Russia, hard money fans) would find the rebalancing scenario you describe to be less ucivilized than today’s circumstances.
July 23, 2021 at 5:57 am |
Good article Yra……USD Index and EURO on verge of major breakouts…..possibly today.
Charts say moves will accelerate after breakout, which would be a sign of increasing deflationary pressures.
Russell 2000 appears to be forming a big top……the weak stocks go first……FANG++ is a defensive trade IMO.
July 23, 2021 at 8:20 am |
[…] Link Here to the Blog Post […]
July 24, 2021 at 4:48 am |
Ray Dalio & Summers share their thoughts on the risk of inflation, what’s next for the US dollar, and the Fed’s difficult dilemma.
https://www.bridgewater.com/research-and-insights/ray-dalio-and-larry-summers-discuss-the-new-paradigm