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FRA: Hi, Welcome to FRA Roundtable Insight .. today we have Yra Harris. Yra is a independent trader, successful hedge fund manager, global macro consultant trading foreign currencies, bonds, commodities and equities for over 40 years, he was also a CME director from 1997 to 2003. Welcome Yra.

Yra: Richard, nice to have you back from Argentina, I haven’t seen you the last time since you were in Singapore so–I cant really follow you. You’re like Waldo.

FRA: Ok, sure. Maybe we could begin with a feedback on what happened on this afternoon, federal reserve, FOMC (Federal Open Market Committee) needing your thoughts on fed share, Jay Powell statement and press conference.

YRA: Yeah—you know, It was interesting that I was just watching the CNBC before we starting going on and Rick Santelli hit it right on target. I’m a fan of Rick, but we don’t always agree. But he had it on target. The one good thing Jay Powell did is he basically said stop relying on (unintelligible]\), because when they go out, the main stream media loves them because it’s an easy way to understand the fed for what they think is understanding… The fed so they can ask questions about it and he basically—you know—These are projections you know—they kept asking about it and asking about and Powell was very (unintelligible) when he said we made a decision today, to (unintelligible) projections and projections you know are just there. projections, they’re not worth the paper that they’re written on and if you follow the fed and their history with their dot plot, they’re a joke and as I wrote last night, you can go back 2006. Our cash in was far better at comprehending where the economy was than those dot plot projections and that’s just our—being, you know all that wisdom. So I just cant stand these dot plots I wrote in the blog last night that he should erase 50 basis points today and put to rest by doing that. Put to rest to dot plots and say yeah you know what we’re going to watch things here. But with raising 50 points and holding until the balance sheet shrunk to $3 trillion. I think he would of done the market to a much greater service because he would of let markets be markets and if there’s one thing that I really like about Jay Powell is that he does have an understanding on the way market works and he seems to be more willing to let markets work and get rid of the theoretical nonsense that fill the air ways with the feds press conference. I do applaud what he did except that I really would of like to see 50 basis points in a whole. Not that I would you know, bullish or bearish the stock I care not about that one way or another cause, I’m going to trade what I see anyway and react accordingly. But it would of put feds note to me a much more interesting position and you know what they got to stop cow toeing to the markets. You know I like what he was doing while the markets were correcting back in February. That he even had Dudley say that 10% drop is small potatoes, so we need to become more market focus than fed focus. That is the end of that story.

FRA: Now instead of the 50 basis point, the raise being only 25, do you think that the fed independence is coming under pressure by the US administration by president Donald trump?

YRA: Not yet, but it will, it will and a lot says about it again is that he talked about it last night and ill expound on it is that, look it. You read every central bank release, whether it is the ECB, Swiss National bank last week was the paradigm of it cause all they talked about was setting policies relative to the currency.

The Australian bank discusses the value of the currency, every central bank (unintelligible) everybody is out there parading this concept of independence of central banks. while they’re all discussing the importance of the currency values when setting their interest rate polices.

Certainly the Japanese, so its all being done so—with the—Donald Trump wanting to turn around the trade deficit, you can’t help but say hey maybe they are actually onto something because they have an independent central bank well—(unintelligible) the independent central bank that goes upon its course based on what its seeing here you know based on domestic economic activity, while everybody else is setting it to international standards then tariffs become the—I guess the alternative especially when the feds is raising the interest rates and they’re the only central bank really raising interest rates… I know… the bank of England went half a basis point, quarter basis point and they are project to go a quarter basis point tomorrow which we will see. But everybody is looking at the international situation and when I read the fed today there wasn’t one statement about it. Of course we did have Powell and little brainer discuss head wins to tail wins which is on the growth of the international economy but everybody goes through currency value when discussing interest policies.

FRA: So with the feds shrinking its balance sheet and raising short term rates—Likely making the US dollar stronger, will that promote tariffs more on the trade tariffs?

YRA: well I think that if the dollar got stronger, you would see much more action… But the dollar hasn’t gotten stronger, so there’s something else or a few other things that are seem to be weighing on the dollar. Now Powell was asked about that and he spoke to—you know—enhance growth, I’m not sure that there’s enhance growth over Europe anyways, I’m not… I need to see a lot more because if that’s the case then the European equity market should be out performing but you know what? They’re way underperforming the worlds equity market. So I’m not quite buying into that argument yet, but you know I’m going to wait and see first. I just need to see more before I go down that road. You know there are many things in play here which we will see which is why we are getting an increase volatility on a global basis.

FRA: And you’ve written recently on thoughts by commerce secretary Wilbur ross in terms that there will be no trade war… Trading partner of the us will compromise on trade treaty, how would that factor in the US dollar, like the potential US dollar devaluation?

YRA: well you know that’s right, that’s what I call the Kudlow dilemma, Kudlow of course when he got into his post, chairman—chief economic advisor to the president, he said you know (unintelligible) dollar and short gold. Well, not so fast Larry. First of all, be very careful about this because if you have king dollar which Kudlow means a strong dollar. Now we all like a strong dollar if its done—If its effected by good policies, but bad policies and a strong dollar, well that’s not such a good thing. You know—I’m not (unintelligible) grow your way out. You may inflate your way out of your debt problem but you’re not going to grow your way out of the debt problem, so let’s get behind that and if the dollar got too strong then the impotence from the white house would be to have more tariffs because they are hell bent on shrinking this trade deficit so when Kudlow discusses that, he ought to be very careful about where he is going because this white house, Peter Navarro and Wilbert Ross will push for a weaker dollar because a weaker dollar is Mnuchin and Wilbert Ross both said in Davos, is sending soldiers to the ramparts in the trade war that exists every day. So, Kudlow, that’s the Kudlow dilemma. It’s going to be interesting to see how he deals with this. But if, you were to get a dollar rally or even what (unintelligible) said and pretty sure wrote in earlier the week when he talked about a possible rip your face off dollar rally. He was quoting what’s his name (unintelligible name) about that. I’d be very very careful with this administration, they will not tolerate a strong dollar at this point in time.

FRA: And if that were to happen what would be the mechanism to effectuate that through monetary policy with the fed with its independence be compromised?

YRA: Yes! That’s a very good question, we don’t know but you would have the treasury secretary just like he said in Davos talking the dollar down which everybody took great umbrage at, but we’ve had that before, you know—One of my issues with Kudlow—(unintelligible) I respect him for his intelligence, he’s been around a long time. He was a Reagan guy, but you know what the Reagan white house lead the battle through James Baker with the Plaza Accord. The Plaza Accord was an orchestrated attempt to drive the dollar down and how is it done? Really—by sitting everybody down in the plaza hotel and reaching this compromise. We’ll pay because the trade deficit are now going to become an issue for wall street in a way that they haven’t in many many years and they are going to start to effect the movements in the market. Not quite ready yet but these algorithms who think that they have factored in every variable that you need and every headline, they are going to be disrupted themselves by the coming impact if the trade deficit continues to grow. This white house will not sit quietly and they made it an issue, and coming into the election this is going to be an important issue for Trump to hold onto his core constituency.

FRA: And thinking globally—how do you see everything playing out in terms of trade. Will Europe introduce measures to protect against Chinese trade and Chinese investments? So you got Europe Asia the U.S., how do you see it playing out?

YRA: well—we’ve seen that already. There was that article FT (Financial Times) earlier in the week that was talking about how Germany is upset that China is targeting some of the corporate jewels of Germany and… believe me the French are the most protectionists trade orientated going back to— (unintelligible) and I don’t care what Macron says because he inherited that it’s a long standing French tradition—so you know what? As the United States leave the battle, you will see that they will all start tail coating… What the white house is trying to accomplish, so while the white house gets beat up today, it gets beat up today because its easy to beat up on the Trump white house for so many missteps that they made. You watch that the European will follow right on top of this, because they have as much with the Chinese and they run. you know—pretty good trade deficit with the Chinese themselves so lets pay attention to what really is going to take place here.

FRA: And ultimately could we then get global competitive currency devaluation—another round?

YRA: Well I think we already have them. You know even with the yen at 103, 104 or 105, the yen is weak and fairly dramatic especially against the euro currency as we’ve talked about for 3 or 4 years already. That has been an interesting play and even I think that the Europeans, especially the Germans have had enough of the weakness in the yen. If you listen to (unintelligible) again, (unintelligible) very upset in January that Mnuchin and Ross, you know—for the D20 agreed not to target their currencies. Well you know what? Who you fooling? Of course, go read the Swiss statement from the release last week when they held their interest rates at negative 75 basis points. It’s all directed against the currency and the Japanese, every time when you listen to (unintelligible) talk, well—we’re not quite ready we need to see inflation. It’s just a nice way of saying we are going to keep our interest rate policy as it is because it keeps pressure on the currency. Come on, let’s call it what it is. They’re all targeting their currency values by using their interest policies for domestic purposes, but you know what? Many variables are in play here which is what is leading to the heightened increased in volatility. And as we’re talking right now, gold is up 23 or 24 dollars and silver is up 45 cents. This is after a fed increase. The dollar is on its lows, stone cold on its lows. What’s going on here in the market is were going to find out. There’s definitely some significant moves and most importantly is that there are two ten yield curve steepened today. Because… of course they changed the dot plot where it seems that there are going to be three rate rises this year so everybody thinks it’s going to be pushed out further and the feds is not going to be as aggressive as previously thought. So the yield curve, the two ten actually steepened out about 3 or 4 basis points as I’m sitting here.

FRA: Hmm.. Do you see president Donald Trump implementing section 301 of the 1974 trade act where the president can impose duties—If there’s like a perceived violation of trade agreements?

YRA: Yeah… that’s a great piece (unintelligible) last week when they were or two weeks ago when they were discussing 232 on the trade expansion act in 1962 under Kennedy which was interesting when it was passed in October of 1962, that was during the Cuban missile crisis. But they put in these—section 301 of the act in 1974. They put them in just because it was the only way they could get these trade agreements through, is that there is leverage against what they deemed at target as unfair traders so in order to get congress to be able to sign onto it there has to be opt outs based on sort of penalties. So yeah, they’re going to vote. We’ve seen it before with the Japanese in the 80s and the 90s was one of the strengths of the Reagan movement to enact 301. They’re going to use whatever they can—like yesterday we saw them soften some of their demands about 50% car parts in US auto—for NAFTA but they soften on that. Of course, and we saw that the peso. The peso reality and the Canadian dollar was really strong today. There are all types of mechanisms in place where they’re sending messages. Hey you better sit down an pay attention, were serious. We put the seal of tariffs down. (unintelligible) yes we backed off a little bit. We have a lot of tools at our command and we are serious about writing some of the wrongs that we have deemed to taken place in over the last 30 or 40 years. You must pay attention to it because, they have shown that they are serious about this, so they are trying to get better negotiating in so Trump can stand tall and say see. See what I did? I over turned some of these past malpractices and it’s going to help us as business returns to the United States.

FRA: will any of this affect U.S. agricultural exports to china?

YRA: well—It will—there is some rattling, we can see hog prices go down, cattle prices go down, some grain prices are holding up pretty well. Even as we are coming into the Brazilian and Argentinian year grind, the south American harvest will bring a lot of supply into the market. Prices are holding up very well, now that the Chinese may threaten the U.S. agriculture and as you know Wilbert Ross strategically laid out—you have to give them credit because they have done their homework and said look it, they’re still going to be buying our soy beans, I’m not buying it but what Wilbert Ross—I think is timing is wrong on the steel and aluminum because the Chinese, there’s so much—Brazil at a record crop this year. The timing wise is bad, we should of waited about two months for the crop to be harvested and for those to be all distributed somewhat and then laid it out because then the Chinese would have less flexibility. Right now they have flexibility because they can buy more Brazilian beans right now and stick it to the US farmers which could really hurt trump in the November elections, because the American farmers are doing very well. This has been a discussion since the China lobby back in the 1940s. the American heart land wants to do business with china, they always wanted to do business with China and when they embargo China, in the 1940s and 50s when Mao came into power, it hurt the American farmers because it took all those businesses with Taiwan versus the peoples Republic of China stunted American export to a billion people. The Chinese number one have to feed their people, end of story and their growth of Chinese purchases of soybeans which is huge because of the diet changes and more protein base especially with higher grades of protein. You have to feed those animals and a lot of soy meals and the Chinese eat a lot of soybeans. So that demand curve goes ever higher, that’s just not going to change… we’re seeing 10 dollar soybeans which is historically pretty high soybean prices and that’s with record supply. You know—agriculture responds very well to capitalism as prices go higher they produce more, but the demand from china and other countries that have now reach much higher per capita income they consume much more protein so prices remain high no matter how many beans come onto the market.

FRA: Yeah. And the soybean meal needed to feed the chickens, there used to be a saying that they only had chicken on Chinese new years but now they have it every day. Finally, your thoughts on Italy, recently you mentioned the markets are underestimating the importance of current Italian political situation and your reference to Picaso dream.

YRA: The market has fallen asleep, they think that there’s going to be some type of center based coalition that everybody (unintelligible) and that the league are going to get tired of trying to deal with five stars—I think it’s a gigantic mistake because 69% of the popular vote in Italy went to the center right including 5 star and if you try to push them out in order to form a coalition that pleases the eurocrats in brussels and status quo in Italy. Well—(unintelligible) I think you’re going to be running into a major problem and I think that the markets are way underestimating the influence of this. And you get again (unintelligible) I can take or leave most days, but he’s been very good with this. In fact, he’s been writing his warning about what’s taken place and you better pay attention to it. It’s no—Its nothing that is insignificant but the market seems to want to downplay it but we’ll continue to watch this. You know, I laugh because we’ve discussed the European financial institution have a severe problem and if you look at the stocks on the European bank, the deutsche bank—(unintelligible) but all the banks are suffering because the amount of non-performing loans have no been resolved, especially in Italy. So they need to really work this out and yet the 5 star and the (unintelligible) really want to push into… you know what we don’t care where the restrictions are coming from—(unintelligible)—budget deficits, we need to get the economy going and the Italian economy even with these ridiculous low interest rates is not showing enough growth and more importantly with these low interest rates, the debt to GDP ratio, it will be sitting around 132% which is enormous with a much lower borrowing cost, so Italy as you know—major problems facing it. (unintelligible) knows and 5 star knows they’re going to get their way because Italy is not Greece, Italy is far too big… far too big and their impact upon the entire global financial system therefore becomes much greater and as it is how to all work out. This is a very interesting time and yet the market is complacent trying to look past it. But I’d be very skeptical about that.

FRA: Wow. Great insight Yra. How can our listeners learn more about your work?

YRA: Well.. You can certainly go to the financial repression authority, we have a treasure trove of discussion but on a daily and weekly basis. I blog from notes underground which you can get and register for free if you go to YraHarris.com you’ll be able to access it and—as much as I write, respondence to the blog are at such a high level of discourse that, that makes it a must go to place because we really discuss very important things and its done at a very high level I’m proud to say.

FRA: Yeah, excellent. Yeah, great, thank you very much Yra, thank you.

YRA: Richard, thank you as for the opportunity as always, we do get into a good look under the hood as we say.

FRA: Yeap, and we’ll do it again another time. Thank you Yra.

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.