Posts Tagged ‘Gold’

Notes From Underground: How Many `Whatever It Takes’ …

March 20, 2023
… Does it take to screw up banking systems?
For those who may not remember, in July 2012 then-ECB President Mario Draghi said he would use any monetary policy tool in an effort to PRESERVE THE EURO.
During a testimony before EU Parliament on Monday, European Central Bank President Christine Lagarde boasted that the central bank and the EUROPEAN UNION had all the necessary tools to ensure against a banking situation similar to the US and the Swiss authorities. The problem for Lagarde is that EU banks were progenitors of the COCO bonds that caused so many Credit Suisse investors a great deal of financial pain. (Speaking of which, here is a post from 2013 in which we warned about the proliferation of COCO bonds.)
The markets achieved a sense of calm in believing that the global authorities have things “under control” as equity markets rallied, precious metals stabilized and BOND prices fell as now the focus turns to the FOMC meeting that begins Tuesday. Many pundits such as Larry Summers and Mohamed El-Erian are advising Chair Powell to stay the course on the inflation fight and raise interest rates 25 basis points at this week’s meeting that concludes on Wednesday.
The rationale for doing so is that the inflation fight is far from over and because the ECB boosted its benchmark rates by 50 basis points last Thursday some rate increase is warranted. We at NOTES FROM UNDERGROUND VEHEMENTLY DISAGREE. For at least the last four months central bank credibility has been an issue because the PRICE of GOLD was rising even as the central banks became more aggressive in their inflation fight. This has been MY MANTRA for 30 years about GOLD: It’s not an inflation hedge but a hedge against central bank credibility in a fiat currency world. If I were Chair Powell I would confront the PUNDITS with the following wisdom:
The Committee decided to hold rates at 4.75% because of the rapid increase in the TIGHTENING OF FINANCIAL CONDITIONS. We are well aware that last week the ECB raised its overnight bank rate by 50 basis points and applaud their continued efforts to confront their inflation problem. But, the FED has already increased its RATE to 4.75% while our inflation levels have dropped well below those of the EU. It seems that energy and food prices have moderated while FINANCIAL CONDITIONS have tightened  just as I postured at the last press conference. We are PAUSING because we believe LENDING CONDITIONS WILL BE TIGHTENING in response to the turmoil in the bank markets, both locally and globally. While the Committee has acted with the Treasury and FDIC to provide enough liquidity to restore calm we believe the present fragility of the banking system requires DISCRETION AND NOT BLIND ADHERENCE TO THEORETICAL MODEL OF FORWARD GUIDANCE.
In closing, I would add this wisdom from former Chair Alan Greenspan in a speech he delivered at Jackson Hole in August 2003:
“Despite the extensive efforts to capture and quantify … these key macroeconomic relationships, our knowledge about many of the important linkages is far from complete and in all likelihood will always remain so. Every model, no matter how detailed or how well designed conceptually and empirically, is a vastly simplified representation of the world that we experience with all its intricacies on a day-to-day basis. Consequently, even with large advances in computational capabilities and greater comprehension of economic linkages, our knowledge base is barely able to keep pace with ever-increasing complexity of our global economy.”
We at NOTES FROM UNDERGROUND have been a consistent critic of the Fed — 13 years and counting — and endlessly warned that QE and all of its baggage was subverting central bank credibility. We have repeatedly cautioned that global leveraged risk in so many forms would result in financial instability as BANKS rushed to curb transitory inflation.
STOP DEPENDING ON EQUITY MARKETS AS THE TELL IN FINANCIAL CONDITIONS it is a methodology promoted by the purveyors of asset peddling. PAUSE AND TAKE A MEASURE OF THE FINANCIAL UNCERTAINTY INFECTING THE GLOBAL FINANCIAL SYSTEM. The political backlash you will be facing from those warning about how workers will pay the price in unemployment while the RENTIERS GET BAILED OUT. It is FIRST REPUBLIC ON THE BOIL NOW BUT WITH LESS LENDING AND HIGHER RATES ON THE HORIZON THE COMMERCIAL REAL ESTATE LENDERS WILL BE NEXT. IS 25 BASIS POINTS WORTH IT? Where is your cost-benefit analysis?

Notes From Underground: Odious, Indeed

November 21, 2021

We at Notes From Underground on Oct. 31 wrote a post titled, “The Odious Designs of ECB Policy.” It noted that during the ECB post-meeting press conference President Christine Lagarde said — in response to a question of whether the ECB would coordinate TAPERING with the world’s other central bank — “comparisons, for good reason are ODIOUS, simply because we are not thinking about the same economies.”


Notes From Underground: Shedding Some Light

October 17, 2021

It has been six weeks since there has been “wisdom” from NOTES as the Jewish Holy Days gave pause to refresh and recharge the cerebral engine. Let’s hope the time away has borne the fruit that I was seeking to consume. We are posting a podcast I recorded with Professor Barry Eichengreen, one of the best economic historians in the land. His work on the GOLD Standard and the Great Depression is worth a read. It was an honor and privilege to be able to sit in conversation with the Financial Repression Authority’s Richard Bonugli as moderator.


Notes From Underground: A Silver Lining In the Madness?

January 31, 2021

My inbox has been filled with theories (read: concerns) about the targeting of short silver positions by the REDDIT BRIGADE of financial vigilantes. Is this a possibility? In my opinion, YES, as silver has been a very volatile market since the trade dislocations perpetuated by the COVID pandemic. The metals are not like equities because hedgers — miners with real supply — act to keep a lid on prices as they lock in future costs.


Notes From Underground: A Long, Long Time Ago

August 23, 2020

We are back. This is the first blog post after a 10-week break. It has been a nice hiatus from writing as we took some time to reflect and respect the sanctity of motherhood.

I’m linking to an FRA PODCAST hosted by Richard Bonugli taped on Thursday featuring Barry Ritholtz, David Rosenberg and myself. This will be a solid starting point for NOTES FROM UNDERGROUND as it picks up where we left off on June 12:  LONG EUROS, LONG GOLD and looking for some vigor in the commodity markets.


Notes From Underground: The Economic Consequences of President Trump

May 17, 2020

(NOTE: The following post is not political in any sense, but just a criticism of a major ill-conceived POLICY.)

This is a story of two pivots.

The first is Federal Reserve Chairman Jerome Powell in January 2019. The second is President Donald Trump in May 2020.

Powell’s pivot away from interest rate increases and balance sheet shrinking created a significant rally in equity and asset prices. Trump’s pivot on the DOLLAR will have disastrous results that are manifested in the GLOBAL DEFLATION that central banks have been trying to prevent. What is the reasoning behind the President’s recent shift away from a weak dollar to promoting the positive outcomes of a strong currency?


Notes From Underground: Whatever Happened to the Taylor Rule?

April 27, 2020

First off, I’d like to thank everyone who contributed to the Santa Mike/Covid relief at St. Vincent de Paul, a long-standing charity that gives every penny to those seeking help for hunger, clothing and medical assistance. Thanks to you, we have contributed more than $30,000 and for that Santa Mike is very grateful. As Mike keeps telling me, “Do you know how much $30,000 dollars of food is when bought in BULK?” This truly makes a difference for those struggling to get by in these extremely difficult times. SO THANK YOU ALL SO MUCH. Every donation matters and there are multiples because Peter at St. Vincent de Paul has procured some donors who are doing matches. That only makes NOTES FROM UNDERGROUND worth doing in even bigger ways.


Notes From Underground: The Exciting Game Without Any Rules

March 24, 2020

Well, the apocalypse has fallen upon the financial markets much as we have discussed at NOTES FROM UNDERGROUND on February 2. The onset of the DEMAND SHOCK has unleashed the fears of a deflationary spiral. My readers have been WAY AHEAD of the CNBC crowd in analyzing the potential outcomes and predicting quality trades as the PANIC IN NEEDLE PARK fostered by the central banks was/is beginning to unfold. Any person who thinks any economic release has market value raise your hand but keep it six feet away as you are likely contagious.


Notes From Underground: My Fantasy News, “China Swaps U.S. Treasuries For Fort Knox”

March 22, 2020

This headline would have seemed ridiculous eight weeks ago but today it has great relevance. If I ran the PBOC (or rather had the totalitarian impulses of President Xi), the command from above would be trade in the overvalued U.S. debt instruments for a 3,000-year vehicle that’s a reliable store of VALUE. The world’s central banks have confirmed a central theme of NOTES FROM UNDERGROUND: It is not inflation they fear but the onset of a DEFLATIONARY SPIRAL.


Notes From Underground: A Microscopic Germ Packs a Wallop

March 2, 2020

There is no doubt little organisms can wreak havoc in ways that blowhards could never imagine. People are trying to assess the financial impact by looking at previous pandemics. This is flawed analysis because each pandemic is different depending on the global circumstances and the morass for incubation. During the Cold War people did not move freely so political containment acted as a drag on the spread of disease.