Notes From Underground: Odious, Indeed

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.”

As a result, I recommended being long GOLD, SHORT EURO as it seemed that the ECB, under the direction of its president, would keep European interest rates lower for longer regardless what path the FED, BOE, BOJ, BOC and others took.


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The EURO has dropped 3.5% versus the DOLLAR since the close of Oct. 28, but what’s more significant the euro has declined almost 8% versus GOLD. This has been a dynamic move reflecting the market’s understanding of what President Lagarde meant by ODIOUS. This spread could simply use some CORRECTION as the pace of GOLD‘s appreciation is unsustainable. Even though inflation data has continued to ratchet upward, BOND markets have seen yields drop over the same period as the recent rise in the price of GOLD since the impact of central bank activity punishes any shorts in the global debt markets.

Since Lagarde’s incendiary remarks, German bund futures have rallied from to 1.7234 as of the Nov. 19 close from 1.6880 as yields dropped to -34 basis points from -9 basis points even as October’s consumer prices reached a 13-year high of 4.1%. It remains a certainty that German savers are the most financially repressed people in the developed world as REAL YIELDS tumble below a NEGATIVE 3%. While the past week brought news of an increase in covid cases in Europe, but German bond yields had been on the decline before fear of new shutdowns crept into the market.

There was a Financial Times article Friday titled, “Euro Hit By Bets ECB Monetary Policy Will Diverge From Major Peers.” The story quoted Amundi’s Leandro Galli, who said, “The ECB is also likely to tread carefully in tightening policy so as not to trigger any rise in borrowing costs for more indebted eurozone members such as Italy.” Earlier in the week the ECB issued a warning of “exuberance” in housing, junk bonds and crypto assets. In a separate FT published Nov. 17, the central bank said “its own ultra-loose monetary policy, under which it cut interest rates deep into negative territory and bought trillions of euros of bonds, had increased incentives to engage in more risk-taking which could become excessive and lead to the build-up of systemic risk.”

While the ECB is forthright in announcing its policy as the catalyst for a broad spectrum of ASSET APPRECIATION, it places the burdens of curtailing housing, equity and commodity appreciation by each EU member state using macroprudential tools to forestall any negative system-wide impact. The central bank clearly noted that it was opposed “to leaning against the wind by tightening monetary policy more than is needed to achieve its inflation target.”

The hubris of the ECB and all the other developed world central banks is what is driving GOLD and other asset prices as central bank credibility is being called into question. Investors are beginning to realize that the central banks have no exit policy to the QE programs that have doused the financial system in liquidity.

The EUROPEANS may believe weakening the EURO by keeping interest rates LOWER FOR LONGER — thus giving them a TRADE advantage — is a worthy policy but it is wrong for this present time. The main concern for the world is not TRADE but the massive amount of DOLLAR-DENOMINATED DEBT. In the last decade, global debt has grown to $330 trillion from $200 trillion, according to IMF, BIS and IIF. The dollar’s status as the world’s reserve currency means a large percentage of the DEBT is denominated in U.S. currency, especially because the Fed’s aggressive QE policy has sustained very low interest rates to enable DOLLAR funding for many emerging market businesses.

Many emerging market central banks have begun raising rates to keep their currencies attractive so as not to create stress for their private sector dollar borrowers. But how high can rates go in Brazil, Mexico, Russia and others before their economies begin to slow?

The Europeans need to be more concerned about its policy of LOWER FOR LONGER sending the DOLLAR to levels that cause global systemic stress in the DEBT markets. Lagarde is pursuing a one-dimensional goal in a multi-faceted world. While some may not think this is ODIOUS it will prove to be reprehensible. Market signaling mechanisms are broken in the face of massive QE purchases so there are no market forces to upset the ECB agenda, or the BOJ’s. The FED is going it alone … maybe. Perhaps it’s time for a G-7 meeting?

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