FRA: Hello welcome to FRA’s Roundtable Insight .. Today we have Yra Harris. He’s an independent trader, successful hedge fund manager, global macro consultant, trading foreign currencies bonds commodities and equities for over 40 years. He was also CNE Director from 1997 to 2003. Welcome Yra.
Yra Harris: Well Richard thanks for having me.
FRA: So we begin today with the discussion with what you’ve been writing about “Feeding the Ducks When They Quack”. Can you elaborate?
Yra Harris: You know it comes from the trading floor .. it was always said that when the retail customers came in or any customers who were buying at the top or selling at the bottom,most the time they would come chasing the market and the tongue in cheek attitude,the ducks are quacking feed them and give them what they want. It’s just a trader’s term. It has a derogatory side to basically that the public is always wrong, but you know being a foreign currency trader I learned that wasn’t necessarily the case because, yes, there always has to be winners and losers, but a lot of times you can be opposite the side of the central banker orsomebody doing a massive hedge. So there was room for the public to be more right than the banks believe it or not .. but in this regard as long as the Central Banks are buying and this is what I’ve failed to understand since what we saw in Japan. Of course, once the United States embarked upon quantitative easing, the first blush was actually that the long end of the curve yields went higher because the people who had hedges were afraid that there’s massive infusion of liquidity in the system. Then we’re going to have inflation, if not inflation we’re going to have a greater growth .. So people were actually selling the long end of the curve and were getting steepening, but then when they commenced upon more buying nobody was willing to take on the Central Bank, the Fed. And there were no sellers, sellers disappeared because as I talked about ad nauseam and Rick said over the last 10 years when he would interview me and that basically, you couldn’t make any money. And then the hedgers disappeared because why hedge? You knew that the bank was there compressing yields and essentially when they embarked upon QE2, there became no need to hedge. And as I’m going to write on the blog tonight, I’m going to pick up on Chris Whalen’s wonderful piece that he wrote the other day. I have it sitting on my desk and the Fed doesn’t hedge, the ECB doesn’t hedge because when you have a printing press what do you need to hedge for. If you have the ability to create money whenever you deem that you need it. So why should you hedge? Chris Whalen really beautifully talks about the dynamic hedges that disappeared from the market, which is again another part of the reasons that we are in such a low volatility environment. So that’s what my attitude has been. When the banks come calling you have a natural buyer .. I always thought that the Chinese if they were looking to liquidate some of their treasury portfolios for future inflation, it was time for them to do that and do the ducks are the Fed and all the central banks and their quacking is when they’re buying. So you should be feeding them and when they ran the 10-year, it was Central Banks as much as anything that ran the 10year over the summer down to 1.35/1.36 again. Anybody who needs to unload Treasuries should have been unloading them to the buyers that existed. That’s the purpose of that wisecracked comment “to feed the ducks”.
FRA: And so for 2018, do you see rising interest rates across the entire U.S. yield curve or just a steepening with the low end not moving much?
Yra Harris: I don’t like to make solid predictions like this that I did in the blog last time because some of the people I’ve met who are retired successful business people, who love to discuss markets. When I look across the board and all the readings I’ve done in putting into action really what Chris Whalen talks about .. there is going to become a breakpoint and that’s when there is no longer a Central Bank adding to the global liquidity structure through QE. So now that the ECB is down to 30 billion and the Fed is actually taking out 20 billion a month and the Japanese of course are curtailing their buying, they have been curtailing their buying anyway because there’s just not enough paper for them to buy. And they could have a greater impact or as great an impact by buying far less than they have traditionally been buying or been recently buying I should say. I’m looking for the curve to steepen. I think as I read Jay Powell and I’ve done a lot of research lately and going back to the recent release of the FOMC discussions from 2012. I think Jay Powell will go to maybe 1.75 to 2 percent on the Fed funds, but from all he has talked about in his discomfort with the size of the FOMC balance sheet that you might see them increase Boockvar’s quantitative tightening, which will put upward pressure on the long end of the curve. So I don’t think that they’re willing at this point in time until they really see wage inflation for whatever reason they’re going to hold real yields at neutral, zero. So if inflation is 1.8 and you’re 1.75 on the short end and so they’ll keep those in. If they keep the real yield at basically zero, then they’ll stop there. And then all the pressure will be for long end yields to rise. Now a lot of people say well that’s going to kill the economy. No it’s not. If the yield curve starting to steepen out, the stock market I think will take an original sell-off, but I think it will be the opportunity to buy back in equities because steepening yield curves are not historically negative equity markets. In fact they’re actually positive because it reflects the fact that the Fed is kind of a neutral and somewhat accommodative, but not crazy so you know that’s my scenario. And I think as I said we’re going to go to 3-4. That’s my call for the 10 year at the end of the year. And if that puts the curve at 1.5, so be it. So that would be a fairly steep curve .. That’s what I’m looking for. And a lot of it is based on the fact that as the Fed says to do quantitative tightening, there will be more private sector or market participants who are buying. Who’ll have to step into the void to replace the Fed and they’ll have to hedge. Chris Whalen’s wonderful work is that dynamic hedging will slowly creep into this market and will make an impact on the long end yield.
FRA: Will that be an impact that does anything to the bond bull? What are your thoughts on Bill Gross’ assessment of the end of the bond bull? What will happen to the 10-year and 30-year bonds?
Yra Harris: I’ve been a big fan of Bill Gross. I was a big fan of Paul McCulley. You know they did some great work, but Bill Gross wrote a piece three or four years ago. It was interesting because anybody who’s a global macro trader and in bonds. Certainly, those who partake in bond markets. Bill Gross wrote a piece .. I have great respect for him. In a way, he hasn’t done well over the last few years and he’s kind of struggled .. He wrote a piece saying that maybe he was just lucky. But you know what we talk about it was the end of the bond bull. And then today he’s out saying well you know he expects rates to be 2.8 by the end of the year on the U.S. 10 year Treasury Bond. We’re at 2.57 today in the morning. With everything that’s going on in the world, that’s not much of a call. So that’s the way I’m looking at it. Is it the end of the great bond bull? I don’t know. I’ve got a lot of other things that I’ll look at to put this in because it’s all about context. Everything is about if you don’t have context and perspective you really don’t have much of anything anyway. So that’s what I’m watching. And I believe it. I have great respect for Bill Gross. I have great respect for Jeff Gundlach, as a big thinker. I think they’ll get Europe wrong because they’ve never bothered to read The Rotten Heart of Europe. These people have never read it .. So it’s nice that the Fed stepping back. I think Jerome Powell will vote to shrink the balance sheet. I think that’s where his comfort zone is. And I think Jerome Powell as I stated in the blog last night, where he actually talks to market participants unlike all the governors, who seem to be very insular and just a giant echo chamber. He is a governor, but he seems to want to actually talk to real market participants. In that regard I think he’s a little leery of the flattening that’s taking place, he doesn’t want it to continue. And if he really thinks it’s true, then it’s time to really increase the shrinking of the balance sheet. And I think that will get us a steeper curve.
FRA: And speaking of Europe where do you see the ECB policies going? Monetary policy?
Yra Harris: Well good question. There are things that scare me over in Europe. We talked about the upcoming election. In Italy, in the failure of the Germans to put together a government, these are things that need to scare people because things are not smooth there. And Draghi is in a terrible situation. And again, I will call anybody out on the carpet and anybody who you want to put on and discuss this because it needs to be debated. These people throw out things like the ECB has a has a single mandate, it’s inflation that’s baloney. Mario Draghi in July 2012 told you forget about the inflation mandate, the mandate is securing the existence of the Euro currency and the preservation of the EU. And if you don’t understand that you really need to go in and lock yourself a library and start reading and put the perspective together for yourself. That is what this is about. And so what happens now? Berlusconi is out. And meanwhile Berlusconi and the the Northern League and Fivestar who are not very enamoured with the ECB nor with Brussels are all pushing for various things about the Italian economy. Berlusconi was out yesterday talking about a flat tax and how good it will be. So they’re all playing off the Trump theme, but with Italy running 136 % debt to GDP ratio. And I know your listeners you know in the realm of the Financial Repression Authority understand this. It’s an enormous number that’s way beyond Rogoff danger of 90 % when countries get themselves in trouble and that ratio isn’t even shrinking. I think Italian 10 year yields were down to 1.7 percent. So the amount of money, the amount of the budget that goes to paying interest rates is probably historical in Italy recovering even at debt because of the manipulated actions of the ECB. Imagine if rates start to go higher there. So this is going to be very interesting to watch. Berlusconi has basically woken up to and I’ve never been a great fan of his, but what he has woken up to is this flat tax idea is he knows that Europe cannot afford to do anything to harm Italy. It is because of that massive balance sheet that Draghi has built up. And again, who bears responsibility? Who bears responsibility for that massive amount of sovereign and corporate debt on the book the ECB. Jerome Powell told told me, in a direct question that I asked him over a year ago, that don’t worry they have a printing press. Well it’s interesting because the Italians who have really been crushed by the Euro in this whole situation. They’ve been crushed because the Italians are famous for making financial mistakes. And they used to be able to bail themselves out of course by depreciating the currency the Lira, but they don’t control the currency anymore. So now they have to do the so-called internal devaluation, which is basically financially repressing workers because you have to keep wages low because you feel you can retain or attain some type of competitive advantage. If you can’t appreciate the currency something has to give. Of course it’s wages. I’d be lying if I told you I wasn’t. I am scared because Berlusconi is going to force it as I say he’s going to call the question. He’s going to call the question. Or he’s going to make somebody call the question and he’s going to look them in the eye and go, “What are you going to do to us?” We saw that you wouldn’t let Greece go. That you bent over a thousand ways and the Italian situation being the third largest economy in the EU, it’s too big and the IMF, they blew their wad with Greece. And they have to be very careful here about push-backs from other parts of the world because they were not happy that they infact got involved in the Greek situation because Greece is part of Europe. Europe is a major developed country. What are you bailing out Greece for? It should’ve been the EU’s situation. And Italy is just too big and Berlusconi with his flat tax is basically, to me, is calling the question: This is how I’m going to stimulate the economy and if you’re going to fight me out it well you’re going to bear the brunt of what do you do. Toss us out? We know you can’t do that because you didn’t ask Greeks out. So we get a free run here. So this gets very interesting as we go forward.
FRA: But will the German credit card be strong enough to make the EU successful?
Yra Harris: That is the $64 trillion question. The question is will the Germans stay the course. What will they get for it. You know this is politics. That’s right. That’s why we don’t study economics. We study political economy because this is the politics of nature .. Merkel she gave a new year’s speech was a joke I thought it was my kindergarten teacher admonishing me about something in the way she talked to the German people and she accepted responsibility. But this goes into what is being spun by the mainstream media. It’s not conspiratorial. That’s a fact. I read the FT front to cover, I have for 35 years already. And the spin is that the AfD and even the Free Democrats did better because people were angry at Merkel for the immigration. And they’re angry because they’re the most financially repressed people in the world because you have 2.5%or maybe 3% growth. You have inflation approaching 2% in Germany and you have the two year shot yielding negative 60 basis points. So they’ve been getting crushed in the effort to bail out Italy and all the others. So these are all things plaguing Europe and look if the German citizens acquiesce and say: OK we agree to a transfer union, we will run in a massive trade surplus of the current account surpluses and we’re willing to transfer money to Italy to help them. We will see you know it if they go that route. Fabulous I’ll go short so many bonds you won’t know what hit you and I’ll buy you know other things. But I’m very skeptical and my skepticism is being actualized by the fact that we’re now almost four months from the German elections and Merkel has yet to form a government.
FRA: Given the potential in Europe for being the epicentre of perhaps the next financial crisis as Peter Boockvar mentions, could we see international capital flows come from Europe and elsewhere to the U.S. markets especially as you mentioned there could be pressure on the long end of the yield curve with the movement into equities. So maybe the financial crises outside of the U.S. spurring capital flows to the U.S. .. plus the tax competitiveness that Trump has created from the new tax bill.
Yra Harris: That was the scenario that everybody painted for 2017 that we know never played out .. this could be the year .. when I look at the Euro currency chart and right now I have a neutral view to the Euro. In fact, I’ve been writing about I think the Euro it bore the angst about Trump and the dollar last year and Trump’s trade agenda. So money flowed into Europe and the Euro gained 13 to 14 % against the dollar, but also gain 10 % against the yen. I think that’s a problem for Europe .. I think the Chinese are unhappy with the weakness of the yen. I think the Koreans whose currency is the Won is really strong, are unhappy with the forced weaknesses because of the policies of Kuroda .. I think that the dollar is going to go lower but on a broad basis. Otherwise, I don’t think the Euro is going to do much this year. I’m not looking for a big rally in the Euro from here I think it’s kind of played out. I think it has Draghi concerned because he doesn’t need a strong Euro. He likes to point to the strong Euro as a statement about the effectiveness of ECB policy, but that’s to placate the Germans anyway, which is a big part of what he has to do. He is on very dangerous ground here and he knows it because he fights well. The last meeting, Jens Weidmann, who is the president the Bundesbank, who sits on the Executive Council of the ECB, they’re voicing their concern and others are joining to get the quantitative easing program has gone too far. So it’s a very difficult time. We’ll see what happens. Last year I thought the dollar was going to lower with Trump, especially with the industrialists, Mark Fields, who was the CEO of Ford at the time when he famously said in February of 2017 that immigration is the mother of all trade barriers. And from that day on the dollar reversed course from strengthening Will we go back down there? No, but I think that 123 area which I will tell you goes back to the range of the week of July 23rd, 2012 when the Draghi, of course, made his famous speech about no taboos and will do whatever it takes. I think that week it was around 120-70 in the Euro and ended up to close I think around 123-80 ..
FRA: For 2018, do you see some type of commodity bull market especially in precious metals and agricultural commodities?
Yra Harris: Yes it’s a great question. It’s a hot topic for a lot of people right now. Yes, I think people are looking to purchase hard assets because our commodities are using securitization like the Chinese are so famously good at securitizing copper whatever. They’re leveraging themselves up, they’re securitizing anything and everything .. I think they are right that commodities have been on the low end of the cycle. So it’s now time and we know that there’s going to be a lot of money with the velocity of money has disappeared. I’m looking for an increase in velocity as the Fed starts to unwind its balance sheet because there’s this money that was tied up at the Fed. The Fed grew its balance sheet because of reserve situations that pile up that these are going to be released. Ben Hunt had made that point for the last year and a half and I applaud him for that I think there’s some validity to it .. we heard the same story last year. I was looking for the Trump inflation, I’m watching very closely to see if now Trump proceeds down that path of being able to get a bipartisan deal on an infrastructure program of significance for the U.S. So there’s a lot of things in play here. The Chinese with their nose know we talked about before when they first announced it about three months ago that they were doing the Yuan-gold-oil interest in arbitrage that helped play it. It is interesting to start to see that we were getting some movement in the commodity sector across a broadly based basket.
FRA: And your sugguestion to the Swiss National Bank would be that they sell their equities and go to hard assets?
Yra Harris: I would say that .. They made their portfolio increased 55 billion with money that was printed in order for them to keep control of their currency. They printed a massive amount of Swiss Franc which they’ve converted to other currencies which they bought equities and they’ve done so well so the paper profit 55 billion last year equal to eight percent of their GDPall through the creation of money in order to keep the Swiss Franc weak, which they’ve managed to weaken against the Euro last year also by about 10 percent even though the Swiss itself held against the dollar was a little bit stronger .. But I would be looking to swap out, but I know they are caught because if they do that the Swiss will gain in value and have been trying to prevent it. I guarantee you that this will be some of these great dissertations on what the Swiss National Bank did .. I think we’ve covered the Swiss as well as anybody, in fact, I did see something that came out from the Ludwig von Mises Institute this morning really discussing in greater detail everything we’ve discussed the Swiss. If I was a Swiss I would for the sake of Swiss citizens start to be moving out of some of that.
FRA: And you gave them the Alchemist Award of the Year.
Yra Harris: Yeah, they definitely get the Alchemist Award of the Year, the ultimate cryptocurrency.
FRA: And finally your thoughts on Larry Lindsey as Fed Vice Chair?
Yra Harris: Oh you making me go down that path. I’m a big fan of Larry Lindsey. I have a lot of respect for Larry and I respect him for exactly why Trump probably won’t pick him is because Larry Lindsey answers. Larry Lindsey is an exceedingly bright analyst. I went back and read some of his old Fed speeches. In fact, I look at the piece in 1996 when he really was not in favour of, or he thought that the markets were ready to exuberant equity markets and they were doing a disservice to hold rates even though he voted with the majority. There was only one dissenter that was Gary Stern from the original Minneapolis bank. But he speaks his mind and he speaks his mind so forthrightly that he even took on the Bush White House when he was a member of that White House as the head of the Council of Economic Advisors and said that their numbers and what the Iraq war would cost in 2003 were way too low. And you know he got sent out into the hinterlands .. He bore all of this to the administration and was sent out to the wilderness, but he spoke his mind and he proved very prescient and he was right. So he tells you he speaks his mind. I think that Donald Trump would fear Larry Lindsey as a role because he’s talked about to be vice chairman which is usually a passive role. Donald Coleman was Vice Chairman to Greenspan and Donald is exceedingly bright, but he knew his place and the same with Stanley Fischer. Vice Chairs’ don’t like to buck, but Lindsey in my estimation will be a bucker of that he will not sit quietly and he will voice his opinion, and it will be heard. And I think that he would overpower Jerome Powell. It’s just my opinion. I don’t know anything else, but it’s what I feel about it. As much as I would love to see it I am a heart to heart money person, I believe that responsible policy is what holds and what’s needed in a fiat currency world. And I think Larry Lindsey would bring that to the table, but I’m not sure that Trump White House is not looking for that type of person. So we’ll see. That will surprise me and I’ve been right on every Fed pick when people where saying it was going to be Gary Coleman, I vote no chance. In 2013, when it was supposed to be Larry Summers, I stood tall and said there’s no chance it’s going to be Larry Summers because I believe that Lizzie Warren was going to block Larry Summers .. we got Janet Yellen which is not bad, I think Yellen played as good a hand as she possibly could with what she was dealt. And I think she’s done a very good quality job. So we’ll see. I’ve been pretty good with this so because it’s not just economics, it’s politics. And let me end by to ask you a question because you’re pretty astute on monetary affairs. So yesterday the St. Louis Fed put out a very short paper title “FOMC Dissents. Why some Members Break from Consensus”. They talked about the way the Fed Board has voted. The St. Louis Fed did a study of the vote of the Fed Board. OK so they looked at the voting patterns. Since 2005 in what has been a major historical period for central banks. Major historical period around the world especially with the Fed. How many dissents have there been by the governors, not regional presidents FOMC governors to any vote. How many dissents over the last 12 years?
FRA: A low number or zero?
Yra Harris: Zero. Can we think about that? Can we think about the power of that in the most turbulent period of central banking? The amount of dissents by FOMC governors has been zero. That should leave us all speechless. I have nothing else to say.
FRA: That’s a great insight and words of wisdom from Yra Harris. Yra how can our viewers learn more about your work?
Yra Harris: They can head to the blog https://yragharris.com/ or all the podcast that I’ve been so honoured to be able to do and to be selected for the FRA, the Financial Repression Authority which have been great. What I blog Notes From Underground is free. All of a sudden the level conversation, the responses to the blog is amazingly high level. I am so honoured by that because the discussion is great .. People read it have serious questions .. It allows me to think and put my thoughts together and put it out there and get feedback from very intelligent people so it helps my training in that way. So it’s not you know so many things in this world today are about validation. People need to be revalidated, that’s the problem of social media. You go to be validated. I’m a Marxist. I need dialectical discourse. And so we are getting it. So people should absolutely go and by The Rotten Heart of Europe .. It’s not my book. It’s written by the brightest guy in Europe. Bernard Connolly. People need to read this book. Europe is going to take center stage in so many different ways. You need to know who the actors are so that you are not blindsided or held captive by a narrative spun by the insiders .. understand what’s going to take place or who’s involved.
FRA: We will have a link to that on the transcript on the website and also a link to your site. and a link to Chris Whalen’s Article that you referenced as well.
Yra Harris: Oh yeah. I sent him an email about how great it was. It’s a great article. Thank you.
FRA: Thank you very much Yra. Thank you.
Yra highly recommends reading The Rotten Heart of Europe – send an email to firstname.lastname@example.org to order