Three weeks ago I recorded a podcast with Bernard Connolly, author of “The Rotten Heart of Europe,” and one of the greatest global macro minds. Utilizing global money flows and more than 45 years of analyzing political economic realities, we at Notes From Underground have tried to unlock some of the “mysteries” of the global financial landscape in an effort to find profitable trading opportunities across myriad asset classes. The blog strives to take into account nuance in order to seek out profitable trades with as low risk as possible. That’s why we’ve always advocated patience in an algo-driven world.
Europe has been a critical center for much of the effort to discern profitable trades as it acts as a catalyst for yield curve plays and negative interest rate policy, leading to global movements in precious metals, commodities and relative value currency trades. Much of my knowledge has derived from reading the copious amount of Bernard’s work as well as engaging in direct conversations.
This podcast will not result in any direct trade today or tomorrow but if you listen it will provide the backdrop to unleashing profitable trades going forward. Being able to discuss these issues with Bernard is not a right but a great privilege. Enjoy the 90 minutes and please respond with questions and comments so we can ferret out profitable opportunities.
***There is so much going on in the world of FED speak (probably too much) that will be covered in another post as we try to make sense of the central bank’s failure to end QE back in December. Yet all the voices since the January meeting are all so strident in their desire to raise rates in an effort to curb headline inflation. Let me be clear: FOUR RATE HIKES OF 25 BASIS points in the next year will still leave REAL YIELDS ON THE SHORT END OF THE CURVE AT A NEGATIVE 2%, which will have minimal impact except on those borrowers at the lower end of the economic spectrum.
Asset prices are more bothered when REAL YIELDS are positive as opportunities arise outside of questionable risk investments. As Walter Bagehot wrote, “John Bull can stand many things, but he cannot stand two per cent.” Ultra low REAL YIELDS promotes bad investment decisions. The problem for the FED is that the world is aflame with highly leveraged asset trades funded by the massive QE programs of the world’s KEY CENTRAL BANKS — ECB, FED, BOE, SNB and BOJ.
The FED can raise rates in a slow process but to me the key to unlocking the speculation of myriad assets is found in quantitative tightening or shrinking the balance sheet. Chairman Jerome Powell pushed off the day of embarking upon QT but many FED presidents are raising the issue: Atlanta Fed President Rafael Bostic last week raised the prospect of the central bank starting its balance sheet unwind — a QT program of $100 billion a month — by around JUNE. If the FED begins that program the unraveling of highly leveraged risk assets will elevate us all to dust off Hyman Minsky’s work. Volatility will unsheathe its sword on the global financial system. The FED fears inflation for now but wait for the systemic risk unleashed by high risk positions being unwound. Enjoy the wisdom of Bernard.
Tags: Bernard Connolly, central banks, Fed, QT, quantitative tightening, real yields
February 1, 2022 at 8:06 pm |
Yra
Profitable investment (not trading) idea
As you point out, VOL will explode even further violently if QT withdraws liquidity from risk markets.
Curiously, despite the January VOL eruption in rates and stocks, gold continues to go nowhere fast
Jeffrey Gunflach made a rather mundane remark yesterday
He said that for him, gold is boring. Seems cheap at $1750 and rich at $1850. Then just hangs out around $1800. BORING
This muted VOL seems totally out of whack in a world filled with such unexpected twists and turns.
Any future QT episode should trigger even more VOL.
Will Fed lose the faith of the choir?
As for a trade idea, I favor “long” EDM3.
Fed dot plots melt during any cataclysmic risk sell off due to QT tightening
Best
Mike
February 1, 2022 at 8:16 pm |
Much, much gratitude is owed to Bernard Connolly for The Rotten Heart of Europe. As relevant today as it was when originally published, for it’s depth and quality; it is a revelation and liberation at the same time, and that with every re-read.
February 2, 2022 at 5:11 pm |
Alexander–I could never say it better then what you wrote –thanks for your input
February 1, 2022 at 9:11 pm |
Yra,
Good to have you back, and congrats on the discussion with Bernard Connolly.
Profitable investment idea: WTI Oil futures are still in backwardation with the June 2023 contract nearly $14 under the front month March 2022 (74.74 vs. 88.32). With the ultra low CAPEX going into exploration and production by all majors and independents, I cannot see this lasting long term. Despite the ESG craze, the ecoweenies shame-talking fossil fuels, and electric vehicles taking over our highways by 2025 (yeah, right), I think humans will still want to be air conditioned in the summer, and heated in the winter. Unless the Fed succeeds in pushing the world into a global depression with their hawkish actions (oh, that’s just too funny) distant months are just too cheap.
The Fed is always late, and usually 180 degrees out of phase, so all of the hawk-talk is just that, talk. It’s all fun until someone loses an eye, but through Jan. 27, the Fed purchased a net $12.8 billion of assets in the week, pushing Reserve Bank Credit to a fresh high of $8.34 trillion. Interest-bearing assets on the Fed balance sheet are up by 20% year-over-year and 114% from the January 2020 level. Talk tough Jerome, but carry a very small stick.
February 2, 2022 at 4:38 am |
“ Volatility will unsheathe its sword on the global financial system. The FED fears inflation for now but wait for the systemic risk unleashed by high risk positions being unwound”.
A few comments. I love how the word “Volatility “ is used. It’s CNBC-speak. It means sharp market declines as used, or a crash. In proper usage we’ve had 12 years of volatility on the upside. But that is “normal” to the pundits and perma-bulls.They can’t let the C word, crash, pass through their lips.
With 7% inflation (really closer to 15%) Powell had to talk tough. Yeah, 4 or 5 .25 raises. Compare to Volcker and 20%. But with $300 trillion in global debt a 1% increase is hawkish. A Fed balance sheet question? Couldn’t get an answer.
And as soon as the kitchen gets too hot, Powell will run out of that room. January 2019 redux.
A rock and a hard place. Hyperinflation or VOLATILITY . They will keep the charade going as long as they can.
February 2, 2022 at 5:14 pm
Professor–it is no problem with the interest bearing assets for the FED just sends the money to Treasury and Congress can use it for road repair generating the perpetual money machine and Adam Schiff the ultimate financial moron can praise them for doing a great job
February 2, 2022 at 6:49 pm |
Thanks for that thought provoking podcast with Bernard Connolly.
While the “Powell Pivot” was patented 1/4/2019, we now prepare for the “Powell Pump Fake”. The EDM23 Cafe with Mike Temple sounds like a great place to hang out until then. 🙂
As the Fed has to deal with the most negative real interest rates we have seen in close to a century, I look back to 3/1/2020. The S&P on its lows, credit spreads blowing out, GOLD at $1500. Helicopter money was falling out of the sky and everyone needed to hedge themselves for inflation (and buy an extra lake house).
Gold is up 20% since then in what turned out to be probably the most ideal set of circumstances imaginable. This underperformance reminds me of so many seasons from our beloved Chicago Bears.
Why do you suppose metals are currently so cheap relative to the run up we have seen in all other commodities, real estate, and other stores of value? What did I miss?
February 3, 2022 at 10:15 am |
“Why do you suppose metals are currently so cheap relative to the run up we have seen in all other commodities, real estate, and other stores of value? What did I miss?”
I’m also missing something. With Russia/Ukraine and China/Taiwan, shouldn’t gold have reacted to either or both more positively?
February 4, 2022 at 6:32 am |
Since no one answered Trader B or pgrommit, I’ll try. TRUE PRICE DISCOVERY IS GONE. You could ask the question about why with inflation at 7%+ the 10 year is at 1.80? Or why is the Dow at 35,000 and NASDAQ at 14,000? You both know the answer to that. It’s the same to why gold is at 1800 when other commodities are flying. Gold is different. It is how currencies are measured. If gold was at 5000 or higher where it should be, you think anyone would trust the dollar and allow for the $9 trillion Fed Balance sheet or $30 trillion in national debt?
There are no free markets, only interventions including the precious metals markets. It’s been going on in gold since after Nixon decoupled the dollar from gold.
Paper gold is the weapon of intervention. It will end as physical metals are being removed from the markets which is going on.So from the investor point of view, that’s what you should own.
Hope that helps.
February 4, 2022 at 10:39 pm |
Well done Asherz. Believing that public markets have any “signaling” value over the past 13 years has been believing in the Easter Bunny. It is difficult to see markets as anything but the self-fulfilling prophecy of central banks and indexed products sold to the unsuspecting public. When gold has a significant weighting in a global wealth index, watch the price explode. Until then, it is the enemy of fiat currencies, central banks that print them, and government treasuries that burn through them as if they are limitless. I will close my rant with one last piece of evidence: MMT.
“Serious” economists give this misnomer (it is neither modern, nor a theory) actual discussion and even credence! Hogwash.