Archive for the ‘Germany’ Category

Notes From Underground: Draghi, the ECB and Germany

August 15, 2017

The upcoming meeting in Jackson Hole has become the focus of the global investment community. Why? After Draghi’s comments in Sintra, Portugal on June 27 sent global bond yields higher, the financial world will gauge whether  Draghi’s speech will signal the beginning of their own balance sheet shrinking. If Draghi were to announce the end of the quantitative easing, the impact would be for the EURO to rise for European BOND YIELDS to rise and, most importantly, the greatest increase in yields would be in the peripheral bonds (and maybe the most significant impact will be on global equity markets). BUT LET ME BE CLEAR, I THINK THIS IS A VERY LOW PROBABILITY EVENT and I will do a deep analysis as to why. Yet again:

1. In yesterday’s Financial Times, there was an article titled, “Draghi Faces Easing Dilemma A Strong Euro Sparks Concern.” The article notes that the STRONG EURO keeps inflation down and therefore prevents the ECB from fulfilling its 2% inflation mandate. Draghi is caught in a dilemma of his own making and there really is no way out as long as it speaks to the idea of a 2% inflation target that is self-imposed by the bank. Many months ago I conjectured that President Draghi would prefer a strong rally in the euro before the September German election. A strong euro silences the Bundesbank as it allows for Draghi to use a strong currency as a measure of the success for the ECB’s policy. If the EURO rallies further it will harm the French, Italian and Spanish economies, which are starting to experience growth, than it will impact the Germans. A one-price euro will not lead to Germany losing its edge within the EU for a single currency prevents that so the peripheral nations will have to engage in wage restraint to sustain its recent growth. The idea of wage suppression will hinder a rise in inflation providing the greatest problem for Draghi’s ECB;

2. In Tuesday’s FT, Thomas Hale and Kate Allen wrote a story titled, “Hopes For European ‘Safe’ Bonds Lean On Pre-Crisis Techniques.”  The reporters visit the issues of “aiming to make the continent’s financial system safer, the idea involves taking sovereign bonds from different European countries and packaging them together into safe bonds that would then carry various levels of risk.” This is what we called financially engineered sub-prime debt a decade ago. Take the German bunds, French oats and bundle with Greek, Italian, Portuguese and Spanish sovereign debt and you have a AAA instrument. The urge to create a EUROBOND is the essence of Draghi’s ECB and there are numerous ideas of how to achieve this end. As the article point out, “It is also a way of bringing European sovereign debt markets closer together without explicit ‘mutualisation,’ where debt is collectively issued by multiple countries, an idea that has proved politically toxic in Germany, in particular.”

The politics of the eurobond have become difficult because the Germans are VERY aware that it is the Bavarian Burghers who will be the creditors of the entire project. Every debt instrument must be guaranteed by credible collateral and several of the European peripheral nations lack the credibility of a solid creditor and making matters worse the weak creditors do not have a printing press. Why would Mario Draghi wish to undermine his efforts to backdoor his way to a EUROBOND by slowing the accumulation of debt assets. THE ECB IS NOT THE FED FOR DRAGHI HAS SET IT ON A PATH TO FULFILL THE MANDATE OF THE PRESERVATION OF THE EURO. Draghi needs to maintain the status quo until September 24 when he believes that Chancellor Merkel will prevail in the German election. Merkel has been a willing partner with President Draghi in his efforts to create a more perfect European union;

3. Also in Tuesday’s FT Claire Jones reported on the effort of challenges to the ECB’s QE program. Germany’s HIGH COURT issued an opinion that said some of the ECB’s actions may violate EU law.

In a case brought to Karlsruhe by “… right-wing members of Germany’s establishment” the German Constitutional Court issued a statement that there are “… significant reasons indicate that the ECB decisions governing the asset purchase programme violate the prohibition of monetary financing and exceed the monetary policy mandate of the ECB.” The court decided to refer the case to the European Court of Justice to get a sense of what the ECJ opinion is before hearing the case. The process could take a year before the German Court hears the case. The article cites a point made by German lawyer Hendrik Haag that “the wait for the ECJ decision may well be an elegant way out for the ECB. It may put pressure on the ECB to be a bit quicker with tapering the ECB programme.”

I TOTALLY DISAGREE WITH THIS LAWYERLY ASSESSMENT. In my view it gives the ECB further time to increase the balance sheet so furthering the effort for a EUROBOND. I will await Draghi’s speech from Jackson Hole but again, THE ECB HAS A MUCH DIFFERENT DESIRE THEN THE FED. Mario Draghi will play for time to hope for the best for his guardian angel, Chancellor Angela Merkel.

Heads up: I will be on CNBC with Rick Santelli tomorrow morning around 9:20am CDT.

Notes From Underground: Brainard’s Speech Was So Significant She Delivered It Again

July 13, 2017

Yes, Fed Governor Lael Brainard actually delivered Tuesday’s speech, “Cross-Border Spillovers of Balance Sheet Normalization,” AGAIN. This time it was to the National Bureau of Economic Research Summer Institute in New York City. Of course I jest as to why she redelivered it. Brainard was overshadowed by Chair Yellen’s testimony to the Senate Banking Committee, even though the Fed Chair deviated very little from Wednesday’s House testimony. The interesting thing was that Yellen backtracked on her hubristic statement she made last week about not experiencing another systemic financial crisis in her lifetime. A brazen statement like that is Greenspanish but certainly out of character for the demure Janet Yellen.

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Notes From Underground: Happy Memorial Day, A New Podcast from FRA

May 29, 2017

I am posting a new FRA podcast that was recorded May 24 with Richard Bonugli. We cover many important topics, including the rise of Bitcoin as an investable product. As I have said often, I need to learn more about crypto-currencies and their impact on the global financial system. Unlike Ben Bernanke, I understand GOLD but am seeking to understand BITCOINS. I am striving to learn the workings of the block chain mechanism and relying on the wisdom of one of favorite readers and supporters American Limey.

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Notes From Underground: Angela Merkel Finally Faces Facts

May 22, 2017

Angie Angie

where will it lead us from here

Oh, Angie don’t you wish

Oh your kisses still taste sweet

I hate that sadness in your eyes, but Angie Angie

Ain’t it time we said goodbye  [Richards and Jagger]
Today, German Chancellor Angela Merkel openly admitted that the German trade surplus was large because the ECB‘s monetary policy rendered the EURO to a bout of severe weakness, which helped make “German products cheaper.” It continually amazes me how forthright politicians become once the political storm clouds have lifted. When President Trump noted a similar view he was criticized for trying to force a break-up of the European Union. What was Angie’s angle in challenging the policies of the ECB and Mario Draghi? As I have written for the last six months, the ECB was going to become an issue in the upcoming German national elections. It appears that the Chancellor is getting ahead of the AfD and other challengers about the negative impact of Draghi’s policies that punish and financially repress German savers.

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Notes From Underground: Santelli and Harris Down By the Schoolyard

May 9, 2017

This is the most recent CNBC hit with Rick Santelli as we try to educate the world in another three-minute segment. This unrehearsed spot attempts to dig deep into the financial issues confronting traders and investors. The discussion about France is a continuation from the Notes From Underground post I wrote last night. I stress that the period ahead for Emmanuel Macron is going to be difficult, especially if the center-right wins the Parliament and thus the prime minister position. This summer will be fraught with street demonstrations as the Left moves to prevent any installation of German-initiated fiscal austerity and labor market reform. In typical French political fashion, labor and student groups are warning against Macron governing by decree and bypassing Parliament.

(Click on the image to watch me and Rick discuss French elections.)

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Notes From Underground: Trump Delivers on Using the Dollar as a Policy Tool

April 12, 2017

In an interview with the Wall Street Journal, the tweeter-in-chief was reported to have said, “The DOLLAR IS GETTING TOO STRONG.” As some pundits discussed, instead of Trump calling China a currency manipulator it seems he wants to use the dollar as a cudgel to pressure others into not embarking on policies to weaken their currencies. As I wrote on April 2:

“The Trump Administration’s efforts to curb the U.S. trade deficit may see the executive branch try to depreciate the U.S. dollar if Secretary Mnuchin and Secretary Ross fail to persuade certain global actors to embark upon policies to adjust their current account and trade surpluses. The Fed’s recent tightening has not rallied the dollar–it actually closed lower on the quarter–so if the political status quo is sustained in Europe and no new political crisis emerges, the DOLLAR will become a barometer of Trump’s policies on trade.”

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Notes From Underground: FRA Podcast Replay (January 29)

March 19, 2017

It has been a month since I last wrote. My hiatus was inadvertently extended as Ecclesiastes certainly entered my personal life. My sister Joyce suddenly passed away, which caused me to slow my mind and reflect on many things. Losing your baby sister will  cause one to ponder, or as it was said in Cool Hand Luke: “When a man’s mother dies and he gets to thinking rabbit and running, a night in the box.” So I have put myself in a mental box. However, I have also experienced the birth of my second grandson, thus to every season a time and purpose.

During the seven-plus years I have been writing Notes From Underground I have shared many life-changing moments with my extended family of readers. So it is with a renewed spirit and laser focus thoughts that I embark on analyzing the global-macro world in search of profitable trades and investments. The FRA podcast I posted January 29 (click the highlighted text) is a renewal of this year’s focus on crafting the NOTES narrative. There has been much in the way of global political events during my hiatus but I will refer to some as significant in various aspects as we proceed.

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Notes From Underground: Will Trump Hustle Abe and Ask for 10 Shots?

February 9, 2017

The main story for the next two days will be Japanese Prime Minister Abe’s visit to the U.S. to meet with President Trump. Abe is coming to mend relations after Trump officially ended the Trans Pacific Partnership (TPP) agreement before Congress could even debate the trade treaty. The Japanese prime minister had expended a great deal of political capital in Japan to get various parties to accept a massive Pacific-based trade agreement. In an effort to forestall any discussion of Japan as a currency manipulator, the Japanese are offering all sorts of investment ideas in the context of getting Trump the negotiator to soften his stance on tariffs for Japanese goods, or sourced material from Asia for assembly in the U.S. Japan is a paramount promoter of the global supply chain paradigm.

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Notes From Underground: Things That Go Trump In the Night

February 8, 2017

Please Donald, will the POTUS STFU, PLEASE. This is not a political statement. It is free advice because the more you communicate the less impact you will have. You may be trying to use the bully pulpit to jawbone the DOLLAR lower but every tweet diminishes your influence. Peter Navarro tried to create a weaker dollar but you have lessened the impact of his misinformed missives. Historically, jawboning has had a short-term market effect, but your late-night 140 character references are losing the power to persuade. You must learn that words are like your campaign sexual references, less is more. SO PLEASE, STFU.

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Notes From Underground: Today, It Was Europe (Or, a Preview of Things to Come)

February 6, 2017

Notes From Underground has been concerned that 2017 would be the year of Europe as the ECB’s  quantitative easing policy and NEGATIVE interest rates would be an issue for many of the elections taking place this year. The Dutch, French and Germans will hold parliamentary elections. Those following the mass media will be focusing on immigration while NFU will continually seek to underline the importance of the repressive financial policies of the ECB. It is this narrative we will use to take the pulse of potential upheavals to the status quo. There is no doubt that the opposition to President Draghi is growing. In a threat to the Empress of Europe, Angela Merkel, received news that her coalition partner, SPD, has overtaken her party in the polls.

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