Archive for the ‘Italy’ Category

Notes From Underground: The Magician of Frankfurt Will Be Called to Answer

May 22, 2018

We’ve been discussing the problems in the Italian debt market at NOTES FROM UNDERGROUND for many years but with the Five Star/Lega coalition coming into government many of the issues that were once theoretical are now an increasing possibility. The Five Star group is openly proposing a debt restructuring for Italy in the hopes of spurring growth and improving the Italian unemployment situation. Economic growth in Italy has lagged the developed world economies and none more so then its neighbor, Germany.

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Notes From Underground: The Mother of All Debt Crises

May 14, 2018

Everything in global financial crisis emanates from too much debt being unable to be serviced. The current situation in Argentina is that the state and private sector borrowers won’t be able to pay the INTEREST on its dollar-based loans as the PESO weakens. It takes more domestic currency to purchase the needed dollars to pay creditors, resulting in a NEGATIVE FEEDBACK LOOP that brings the economy to a crawl as all the economic actors have to find ways to pay the interest costs or go bankrupt. The Argentinian government won’t go bankrupt. But it will force a debt restructuring if its borrowing costs move higher (yet another burden for a debt-plagued economy).

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Notes From Underground: The Unemployment Number is Wall Street’s Version of Picasso’s `The Dream’

March 11, 2018

It was the best that Wall Street could dream of: It was a huge headline nonfarm payroll number with a large number of workers jumping into the labor market, which kept the unemployment rate at 4.1% and wage growth at a very tepid pace. Average hourly earnings were 0.1%, which is nirvana for the wealth managers: solid economic growth with stagnant wages. This may certainly be a one-off month as NFP could return to its average or wages begin to rise by at least 0.3% every month. Rick Santelli and Ed Lazear made the case that the increase in the labor participation rate was a great outcome as long time unemployed are gaining confidence in the genuine strength of the economy. The return of the long-term unemployed will show the real amount of slack in the economy, reflecting even more downward pressure on wages. If the slack is greater than the FOMC has previously believed, then the FED may well slow its rate increases. People returning to the labor force is a positive but it may be another kink in the Fed’s models.

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Notes From Underground: Ball of Confusion

March 5, 2018

Segregation, determination, demonstration, integration, aggravation,

humiliation, obligation to our nation

Ball of Confusion that’s what the world is today [yeah, yeah]

The sale of pills is at an all time high

young folks walkin’ ’round with their heads in the sky

Cities aflame in the summer time, oh the beat goes on

Eve of destruction tax deduction

City inspectors, bill collectors,

Evolution, revolution, gun control, the sound of soul,

Shootin’ rockets to the moon,kids growin’ up too soon

Politicians say more taxes will solve ev’rything, and the band played on.

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Notes From Underground: How Many Syllables, Mario?

December 7, 2016

In the 1969 cult classic Putney Swope written by Robert Downey, Sr., the film opens with the death at the board room table of the firm’s chairman, Mario. Not realizing he has had a heart attack the sycophants play charades to get at the message Mario is trying to convey, thus asking HOW MANY SYLLABLES MARIO? Tomorrow, the world will be asking Mario a different question. How much QE, Mario? How long? The European equity markets were en fuego early this morning, led by the German DAX, even as the SPOOs were lower to unchanged. There were rumors about a nationalization of Monti Paschi but it seems that the Italians were trying to delay an actual bailout of the troubled lender and wanted more time from the ECB. MY OPINION IS THAT THE ECB WILL ANNOUNCE SOME EFFORT TO BUY FINANCIAL DEBT FOLLOWING TOMORROW’S MEETING. The ECB has avoided buying financial debt in its QE program because it is also the banking supervisor for the EU.

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Notes From Underground: Steve Bannon (Laugh, Laugh I Thought I’d Die)

December 6, 2016

Even though Steve Bannon is no Beau Brummel, the music of this early rock song must be ringing in his ears. It seems clear to all but the dumbest media talking heads that the Bannon plan of Trump’s continued flow of tweeting is an attempt to make sure the Trump team controls the NARRATIVE. (See Ben Hunt’s magnificent piece at Epsilon about the significance of narrative.) This is important for investors and traders because of Trump’s ability to control the narrative makes us all focus away from the most events of the greatest possible consequence. Today, the airwaves were echoing the Trump tweet of the President-elect threatening to cancel the orders for two new Air Force One planes, the President’s personal fleet.

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Notes From Underground: Oh, When Will They Ever Learn?

November 28, 2016

This is a tough POST to write  for I will criticize a newspaper I have read every day for at least 30 years. (In fact, I still have it delivered on my doorstep and read most of it online in the evening before the hard copy arrives.) The London Financial Times had a front page story, “Troubled Italian Banks Face Fresh Risk of Failing If Renzi Loses Vote.” This is a deplorable headline for it harkens back to the days of the mainstream media warning of dire consequences if Brexit passed and the Trump was elected president. THIS IS SCARE MONGERING. It raises the question: When will the Davos crowd EVER LEARN?

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Notes From Underground: Japanese Elections, Italian Banks and May Day in the U.K.

July 11, 2016

Just some summary points as this year the summer doldrums will prove to be anything but:

1. The Japanese elections for the upper-house unfolded true to expectations but the impact of the win for P.M. Abe will take time to play out. There are winners and losers in Abe’s victory. One of the losers could well be the prime minister as the final results do not provide enough margin to pursue constitution revision because the LDP does not have enough votes without the support of its partner Komeito. More importantly, the TPP (TransPacific Partnership) may not pass because of several opposition victories in the rural prefectures. As Tobias Harris maintains, the “bleak outlook for ratification in the U.S. … the {Japanese} government will have to decide whether it is worth expending political capital on an agreement that may not come into force.”

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Notes From Underground: Low Probability, High Impact Events

April 11, 2016

When Alan Greenspan was Fed Chairman he would regularly orate on the concept of low probability events that could create disruption in the global financial system. These events are not BLACK SWANS because by definition a black swan is unknowable nor foreseeable. So it is time to take a survey of what Greenie called low probability:

1. Paul Ryan being parachuted into the candidacy for the Republican Party. There is a possibility but is a potential problem, which could rip apart the GOP. What would the fallout be for financial markets if the U.S. was splintered into a three- or four-party system? The same could be said for the Democratic Party if there was a revolt by the left-wing in response to the super delegates. The issue for the Democrats will rise to the fore if Hilary Clinton were to lose New York. Bernie Sanders is a low probability bet but his impact would be great.

2. The probability of Russia attacking Turkey, which could result in the break-up of NATO. If Putin attempts to seek revenge against President Erdogan by providing support to the Kurds against Turkey, the U.S. and its NATO allies would be forced to decide if they were willing to risk war with Russia to honor its commitment to a friend. Imagine what happens to the political situation in Europe if NATO were demolished because of its failure to honor Article 5, which asserts that an attack on one is an attack on all.

3. The June 23rd vote by the U.K. on Brexit results in a vote to leave. Not sure this is a low probability event but it will certainly have a HIGH IMPACT. The greatest outcome will be that others in the EU will request a referendum for this was certainly articulated in the recent Dutch vote on the EU’s agreement with the Ukraine. The most volatile result of a Brexit would be the pursuit of a referendum by German voters. The myriad articles on German unhappiness with the ECB are a mere prelude to what a vote in favor of Brexit would result in for the rest of EU. If you want a good sense of the arrogance of the European elite, watch Mario Monti’s CNBC appearance from today. Mr. Monti decried the outbreak of democracy in Europe and was very critical of David Cameron for falling in the trap and calling a referendum.

The critical assessment by Monti is an infamia for Mr. Monti was appointed Prime Minister of Italy by a “coup” orchestrated by the Brussels elite. Berlusconi was forced from office by threats of Italian debt downgrade and the Brussels eurocrats’ rejection of the Italian budget. When Prime Minister Monti had to call elections in 2013 after the Berlusconi term expired, Monti and his allies received a mere 11% of the vote. So Mario Monti’s views of popular democracy are subject to further review.

4. A failure of a major European bank, something on the order of Deutsche Bank or a major French institution. The cracks in the Italian financial system are well known. It is the exposure of other EU domestic banks that can cause a blind side hit to the financial system. Part of this issue is the BIS view of how sovereign debt is rated. Currently, all EU sovereign debt carries a zero risk weighting. If this were to change, EU banks would be forced to raise a great amount of capital, a total that would dwarf the amount that was recently raised to support the purchase of non-performing loans from Italian financial institutions. The European nations are struggling even with zero interest rates. Imagine what the budget deficits of Spain, Italy and France would be if borrowing rates were to dramatically increase.

This is just the beginning of analyzing low probability, high impact events. The landscape of the global macro system are rife with such possibilities. Now a black swan in an uncertain event this focus will be on those with a probability of occurring. The floor is open to all suggestions.

Notes From Underground: Are the 23.7% of Unemployed Spaniards Concerned About Portfolio Balance Channels?

January 22, 2015

Well, the Earth did not stand still and markets were relatively rational as President Draghi unveiled a “genuine” QE program. It was a variation of yesterday’s leaks except the final amount was larger than what was rumored. The ECB will be financing the purchases of a mix of asset-backed securities and sovereign bonds to the tune of 60 BILLION EUROS every month from March at least until September 2016. The QE program is open-ended in that the ECB will reserve the right to continue purchasing more assets with printed euros if the inflation target is failing to rise to the 2 percent target level. The European equity markets were unchanged and the BUNDS and French oats fell until President Draghi assured the markets that the ECB would even purchase credit instruments with a NEGATIVE YIELD.

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