Archive for the ‘Germany’ Category

Notes From Underground: An Arthur Fonzarelli Moment for Yra

November 29, 2017

Six weeks ago I did a podcast with Anthony  Crudele and Rick Santelli about markets. I brazenly said the S&Ps would experience a 10% break before a further 3% rally. The S&Ps were at 2550 and as of this morning the 3% has been actualized long before the 10%. My respects to Rick Santelli, who was right on target with his call to purchase all equity markets for the next period of time. In true FONZI ways, I was wrong. But I have been liquidating long-held stocks into this rally and will continue to do so as I view this 23% rally since the Trump election as a great gift. If I had predicted on November 9 that the S&Ps would be 23% higher a year later, you would have had me committed.

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Notes From Underground:

November 26, 2017

(Click on the image to watch me and Rick discuss yield curves and central bankers.)

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Notes From Underground: Klaatu Barada Nikto (Stop The Printing Presses!)

November 19, 2017

In this famous science fiction phrase from the movie “The Day the Earth Stood Still,” I extract my own meaning: Stop the printing before the world’s financial system is destroyed. Sci-fi writer Edmund North never deciphered the English translation of this “alien” phrase but I believe my interpretation applies to these tumultuous times in central banking. The ROBOT GORT is prevented from destroying the world when the words are spoken to him. Thus I say to Mario Draghi: “Mario Barada Nikto.” The continued use of large-scale asset purchases to enhance global liquidity in a period of increased economic growth is preventing the markets from stabilizing. The proof is in the continued mispricing of corporate debt. Last week, the BBB-rated French firm Veolia sold 500 million euros of three-year notes for -0.026%. Yes, a mediocre credit was able to borrow at less than zero. This is the insanity of the financial world to which the central banks continue to provide liquidity.

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Notes From Underground: But Subjectivity Is Objective (Woody Allen, Love and Death)

November 15, 2017

The airwaves fill with the narrative of the coming corporate tax cut benefiting profits, growth and higher wages. Each side argues that their data is closer to reality: one being static analysis the other dynamic scoring of increased growth. My view continues to be, REAL TAX REFORM, NOT A TAX CUT. Genuine tax reform would provide tax relief for the middle-income earners and most probably result in a tax increase for the high-income earners. Congress has mucked up TAX REFORM as the starting point OUGHT to have been a return to BOWLES/SIMPSON. The problem with the Bowles plan is that it meant spending cuts as well as an effort to broaden the tax base by closing many tax loopholes. Also, Alan Simpson was in favor of defense cuts so it was a genuine tax restructuring as all “OXES WOULD BE GORED.”

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Notes From Underground: Which Spark Will Start the Prairie Fire?

September 27, 2017

In several blog posts over the last eight years I have used the words of Mao to relate to the potential issues that could cause severe disruption to the global financial system. If you listen to the narrative propagated by the mainstream financial media your concerns would revolve around North Korea, the Trump tax and healthcare plans, the FED starting QT (or else citing the Fed’s ridiculous dot plots), concerns about the potential shutdown of the U.S. government, the economic implications of Brexit, etc. The bottom line is that all the forecasters have been wrong for long as Phillip Tetlock revealed in his wonderful book, Superforecasting. The FED has been worshiped as all-knowing fonts of wisdom when nothing they have forecast has proven correct. Yesterday, Fed Chair Janet Yellen admitted that the FED is as confused about the lack of inflation as most of the prognosticators on Wall Street. This confirmed my theory that what the FED peddles IS NOT ROCKET SCIENCE.

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Notes From Underground: Angie, Angie (As Told By the Rolling Stones)

September 25, 2017

Mick Jagger was prescient when he sang these words in 1973:

You can’t say we never tried
Angie, you’re beautiful
But ain’t it time we say goodbye
Angie, I still love you
Remember all those nights we cried
All the dreams were held so close
Seemed to all go up in smoke
Let me whisper in your ear
Angie, Angie

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Notes From Underground: German Elections. The Sound of Complacency Shattering?

September 24, 2017

I will start tonight’s BLOG with two very good comments from a long time reader and contributor GREEN AB who hails from Germany. Green has always provided great insight and though we don’t always agree I have great respect for his perspective. On Thursday he posted a very prescient forecast about today’s election and Sunday he followed with a post-election thoughts.

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Notes From Underground: Is Macron a Moron?

September 12, 2017

On September 7, I had the pleasure of chatting with Richard Bonugli of the Financial Repression Authority, covering topics previously discussed on Notes From Underground. The podcast allows for a much deeper analysis of topics covered here (and usually over a shorter span). Enjoy the conversation, and, as usual, please follow-up with questions so we can all benefit from the intelligence of Notes From Underground readers.

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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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