The global reaction to the first round of the French presidential election was not confusing. Capital was sitting on the sidelines as the polls reflected a possibility of a second round Le Pen/Melenchon faceoff, which would have been devastating for global investors because fear of an EU break-up would have led to a massive repricing of risk premia. The avoidance of such an outcome led to a rush of capital into European markets, which provided support to Asia and the U.S. The German/French 10-year spread reacted as expected. The yield differential narrowed by a significant 20 basis points. The BUND yields rose against all European sovereign debt as Berlin’s haven status was rendered null and void for at least another two weeks. The GOLD and YEN also performed as expected as money rushed to purchase a risk on profile in a global zero interest environment. The EURO rallied by 2% as global capital flows into European stocks forced previous short euro positions to the sidelines. There’s nothing confusing about any of these outcomes. But let me throw some confusion onto some of the other geopolitical events making the front pages:
Archive for the ‘United States’ Category
First, I am reposting part of the January 29 post as a reminder to pay attention to the narrative of Trump rolling back to the concept of Pax Americana. As the Trump administration begins to reveal its ambitions, there is a great deal of conversation about Trump becoming more presidential and that the “grown ups” are taking charge of policy. The demotion of Stephen Bannon ignited a discussion about the Wall Street crowd (Mnuchin, Ross, Cohn, Kushner) becoming aligned with the “Deep State.” The concept of the deep state is really the power of the entrenched bureaucracy as the primary source within the beltway.
On Friday April 14 Treasury released a report that deemed no major trading a currency manipulator but five countries have met two of the three criteria and therefore will be closely monitored. This report is very well laid out but it is not incendiary as it seeks to persuade with a very soft touch. The three criteria of meeting of being a “manipulator” are:
1. A significant bilateral trade surplus with the U.S.of a least $20 billion;2. S current account surplus is at least 3% of a nations GDP; and3. Persistent, one-sided intervention occurs when net purchases of foreign currency are conducted repeatedly and total at least 2% of a nation’s GDP in a 12-month period.
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.”
First, let me apologize to my readers. I erred when I said Marine Le Pen made it to the second round of the 2012 French presidential election. Reader Al 13 corrected me. It was her father Jean-Marie Le Pen who made it to the second round in 2002 and got trounced, garnering 18% of the vote to Jacque Chirac’s 82%. But read Al 13’s comment on the previous post because he notes that if the second round were to be a choice between Le Pen and one of the two far-left candidates–Melenchon or Hamon–the impact would be highly volatile for European markets.
The vote on the Trump health care plan is important only from the perspective of what the Freedom Caucus was promised in return for acquiescing to the desires of the White House. President Trump is desirous of a win, any win and the Freedom Caucus seems to know they have great leverage in the current political scrum. Whatever the House passes the Senate will have home field advantage and last bat so the initial Trump victory will Pyrrhic at best. What was compromised to assuage the conservative wing of the Republican party? How far will Trump have bent to bring this deal to fruition? The strident nature of the Freedom Caucus has been elevated and what value was extracted?
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.
During my hiatus, I spoke with Rick Santelli (click on the image below) to discuss some of the new issues presenting investment opportunities, in addition to concerns surrounding potential negative fallout from ill-conceived models, such as the effect of the border adjustment tax on the global financial system.
We had to get back home
And when we opened up the door