May 19, 2024
We at NOTES FROM UNDERGROUND are posting a PODCAST that was recorded Thursday, which addresses what I think will be an important for the global economy: the uber weakness of the YEN.
That has been the product of global finance as the decades-long zero inflation rate policy has been the immovable object of higher-for-longer U.S. interest rates. It’s helped sustain the interest carry trade, where financial engineers borrow in low-cost YEN and invest in equities, REITs and sovereign bonds all around the globe. The long Mexico/short yen has been a master class in the functioning of the carry trade: 10% Mexican rates and contained inflation resulted in a rising peso and falling yen with a guaranteed 10% yield differential and a strengthening currency as a kicker.
The question for G-7 officials and of course the G-20 is: Has the weakening YEN resulted in an overwhelming competitive advantage for the Japanese in their effort to be “reshoring” industry after the Japanese economy suffered a hollowing out due to an overvalued currency for many years?
There are so many concerns about the political economics of this potential dilemma and with the G-7 finance chiefs and central bankers meeting this week it is a critical time to look into the issues of the YEN and its global role. On Thursday Richard Bonugli hosted Sam Perry of Pictet Asset Management, an expert on Japanese investment, Tobias Harris a well-known expert on Japanese political economy, and myself as we set out to understand and shine some light where so many analysts fear to go. Judd Hirschberg of White Wave Investing was kind to provide real-time charts on various levels of concern.
Enjoy this podcast with the libation of your choice.
Click here to watch the podcast.
Tags: carry trade, G-20, Japan, Japanese yen, Mexican peso
Posted in Currency, Japan | 4 Comments »
March 26, 2024
I know it has been many, many, many, many months since I’ve published thoughts here. But I have been active in the podcast space, discussing macro finance/economics with the usual list of high caliber financial minds on Financial Repression Authority with Moderator Richard Bonugli. And last Thursday I sat with Victor Jones at The Price of Truth/Tasty Live (link is here). Now that the blogging has slowed, I behoove my longtime readers to push for a regular stint with Victor in an effort to analyze market potentials in a real-time format. At this time there is none but if their was a rising demand for high quality analysis it may become a doable proposition.
I generally do not post on X but some longtime readers have been posting blogs from a few years ago, and that has whet my appetite for real time interaction with those seeking to understand the global landscape. Please share the podcast if you believe it offers valuable insight and regardless find a way to Victor Jones and The Price of Truth.
I’ve included words of wisdom from Eric Peters, CIO at One River Asset Management:
Anecdote (Nov 2018): “Why do people feel that to be a good leader, they must absolutely believe in one direction over another, one path over another, one person over another?” asked the investor, an allocator. “Why do most people feel they have to live in a world of absolutes?” We were discussing the illusion of certainty. “We live in a world filled with questions. And the best traders I’ve known have never been sure of anything.” The blessing and curse of this business is that it forces us to come to terms with how little we know. It is at once terribly humbling and awe inspiring, in that to maintain your balance you must continually seek to define a wide range of possible outcomes, possibilities. Which is an exciting journey, requiring imagination, and a recognition that world history is the story of chance, surprise. “The most successful traders speak in probabilities of one thing over another. Not one dares pound the table and state something with absolute certainty.” I have friends who can change their minds twice in the same sentence. They’re the survivors. In their wake are those who needed to be right. “Something in our nature, or perhaps society, leads us to believe that to have gravitas we need to make grand pronouncements, appear definitive. Such statements are almost always wrong.” Yet we continue to listen, in a hopeless pursuit of certainty. “The best leaders amongst us seem to understand that their gift is not in pointing the way, it’s in taking input, maintaining flexibility, openness, adjusting enroute,” he said. “And as a trader, your job is to figure out what others will do because of their political and financial orientation, in a world that is unknowable, forever changing, and then make money with that.”
With fondness for your continued loyalty and respect,
Yra
Tags: financial markets, macroeconomics, trading
Posted in Hodge Podge, Podcast | 16 Comments »
July 17, 2023
We at Notes From Underground haven’t been publishing as frequently but we have been working more intensively than ever. The global financial situation is fraught with many areas of potential hazards to shock the established complacencies of current equity market rallies.
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Tags: doves, ECB, EU, Federal Reserve, FOMC, hawks, SNB, Swiss Franc, US dollar
Posted in Central Banks, Currency, Fed, SNB | 4 Comments »
June 19, 2023
A giant hello and salutations from Notes From Underground.
It has been quite a long time since I have sat down to write about the state of things, but it is not because I haven’t been working. In fact, I have recorded numerous podcasts with the Financial Repression Authority over the last six weeks, sitting down with David Rosenberg, Michael Every and Kevin Muir. Links are below for your listening pleasure.
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Tags: Bank of Japan, currency manipulators, Japanese yen, Ministry of Finance, Yen crosses
Posted in Asia, BoJ, Currency | 6 Comments »
April 25, 2023
On Tuesday, I had the pleasure of sitting down with the Financial Repression Authority’s Richard Bonugli and David Rosenberg to discuss the FEDERAL RESERVE and the global macro financial system. We don’t agree on all things but in an effort to enlighten our audience, we dig deep and shine light where others fear to tread. Enjoy the hour and as always pour a stiff drink. You will need it.
Click here to view the discussion.
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Tags: Emmanuel Macron, EU, Federal Reserve, Politico
Posted in Europe, Fed | 1 Comment »
April 24, 2023
I have a hypothesis of major significance:
As the markets have seesawed for the past six weeks one asset has been consistent: the EUR/YEN cross. The SVB fallout coupled with concern about savings fleeing from other regional and community banks has subsided, allowing for the global equity markets to slough off concerns over undue leveraged risks causing further pain for investors. The Credit Suisse writedown on AT1 bonds — contingent convertibles or COCOS — has dissipated sending the EURO and SWISS currencies to recent highs against the DOLLAR, and, more importantly, versus the YEN.
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Tags: Bank of Japan, euro/yen cross, Federal Reserve, Japanese yen, Kazuo Ueda, YCC, yield curve control
Posted in BoJ, Central Banks, ECB, Fed | 6 Comments »
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?
Tags: ECB, European Central Bank, Federal Reserve, financial conditions, Gold, Jerome Powell
Posted in ECB, Fed, United States | 16 Comments »
March 15, 2023
On the Thursday, the ECB will announce its intentions on EU monetary policy. It still looks like the market is still forecasting a 50 basis point increase in its main financing rate as it rises from 3% to 3.5%. At the previous meeting, Madame Christine Lagarde was adamant that the ECB would be a fortress of solitude in its effort to squelch inflation. This will be important for if the European Central Bank crumbles under the potential collapse of Credit Suisse then it means that the global financial system is very worried about a systemic crisis. CRUMBLE infers the ECB PAUSING in an effort to measure the negative effects of a tumultuous global funding market on GENUINE FINANCIAL CONDITIONS.
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Tags: Christine Lagarde, ECB, Federal Reserve, Lorie Logan, Mary Daly
Posted in ECB, Fed | 9 Comments »
March 12, 2023
A constant theme at NOTES FROM UNDERGROUND has been that the lunacy of Federal Reserve Chair Jerome Powell finding his inner Volcker belongs in the pantheon of fantasy. As I have said before: Paul Volcker wouldn’t be able to find his inner Volcker in a financial system plagued with HUGE amounts of leveraged risk, coupled with a huge overhang of both PUBLIC and PRIVATE DEBT. And yet FED officials are still out there pondering whether to raise 25 or 50 basis points at the next meeting.
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Tags: 2/10 yield curve, debt overhang, Federal Reserve, Silicon Valley Bank, SVB, yield curve inversion
Posted in Debt Market, Fed, United States | 8 Comments »
February 16, 2023
I had the pleasure of sitting down with Joseph Wang, one of the better Fed/interest-rate plumbers, who also has a deep knowledge of all things global macro. Listen closely to the latest podcast as he reveals the many shades of the inner workings of the Fed, especially those insights on Governor Christopher Waller. There are certainly areas where we disagree, which is to be expected, but that is what makes the effort by Richard Bonugli to do these podcasts so richly rewarding.
As always, I advise not rushing into any of our recommendations but to do your own work in context and of course in and levels of risk you are comfortable. The purpose as always is to sift through the amalgam of data/info and find profitable opportunities as we provide a deep dive into context and nuance.
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Tags: Bank of Canada, CPI, debt markets, Federal Reserve, Jerome Powell, Tiff Macklem
Posted in BOC, Debt Market, Fed | 2 Comments »