The last trading day of the year, me and Rick took a BRIEF look into concerns about 2018. Three minutes is not enough time but it does afford the opportunity to put some ideas out that are not people’s screens. As the month progresses we will discuss several items in greater detail. I want to tell readers to review the very vibrant discussion that is taking place on the last blog post. Thank you to all the participants for providing insights into the global macro world. The discussion is first class, representing dialectic efforts, not validation. (A tip of the cap to Dave, Stefan Jovanovich, Chicken, Big Man and Professor Waspi for enhancing the quality of analysis.) Dave Richards and Asherz have been regular contributors and have certainly been on top of the precious metals markets and the weakness of the dollar. Tonight I will briefly discuss some issues outside the generally accepted narrative.
(Click on the image to watch me and Rick discuss what’s on our radar for 2018.)
The recent cover of Barron’s raised the concerns about inflation rising to levels above the FED mandate. The 2% inflation is a philosophical construct emanating out of the RBNZ and its adherence by all the major central banks has created the backdrop of continued easy policy. Stock prices for mining, metals, energy and agricultural all rose in December as some investors try to front run a new narrative of Trump inflation. The TAX BILL is deemed to be too stimulative for an economy at full-employment and the anticipation of a bipartisan INFRASTRUCTURE PROGRAM sets the inflationists’ heart racing.
Former Fed Chairman Alan Greenspan, Alan Simpson and other economists have recently warned that the TAX BILL should have been reform and not stimulus for increasing the deficit at a time of “full employment” is irresponsible. An infrastructure program would result in tightening wages as firms try to entice workers with higher pay to insure enough employees to build out public works programs. If such a scenario develops would the FED be forced to tighten faster and further than the markets are currently pricing? If the FED were to fail to respond the key will be in the YIELD CURVES as recent flattening would reverse, especially as the FED continues tightening while the ECB shrinks its PURCHASES to “only” 30 billion euros a month. Market forces may be able to impact prices instead of being rebuffed by central bank actions, so 2018 yield curves will be important.
Bloomberg reporter Alexandra Harris has been writing about the Treasury Department’s plan to issue more short-term debt as advised by Treasury Borrowing Advisory Committee (TBAC). There is increased demand for short-dated treasuries and T-bills as money funds and financial institutions crave high-quality liquid assets. An inflation scare met with FED complacency will be the key for a steepening. If the FOMC were to actually raise rates aggressively–and by this I mean ACTUALLY raising rates to get the overnight rate to a REAL YIELD of 1% or more–then the entire global financial outlook will have to be revised. This will test the resolve of incoming Fed Chairman Jerome Powell. A POSITIVE REAL YIELD on the SHORT-END would give rise to a DOLLAR RALLY, CORRECTION IN EQUITIES and send the PRECIOUS METALS LOWER. BUT, with the ECB and BOJ remaining at negative short-term rates the ultimate play will be LONG GOLD and SHORT the negative-yielding currencies. If the FED raises rates to 2% while inflation is 2% or higher the effect SHOULD be minimum as real yields would remain ZERO. This will be a fundamental that we will watch as the trading year gathers momentum.
BUT I CAUTION: News out of Washington said President Trump is considering Larry Lindsey for Fed Vice Chairman. As an advocate of HARD MONEY I WOULD LOVE TO SEE LARRY LINDSEY IN A MAJOR POSITION OF MONETARY POLICY. Lindsey is someone I have respected for years and his street cred was firmly established when he challenged the BUSH administration over the projected costs of the second IRAQ War. He was the head of the National Economic Council at the time and he was pushed aside by Rumsfeld for maintaining that the Iraq War would be far more expensive than White House projections. THE POINT IS THAT LARRY LINDSEY IS ONE WHO SPEAKS HIS MIND AND AS FED VICE CHAIRMAN WOULD NOT BE AN ADVOCATE FOR CONSENSUS. The FED could certainly utilize a strong contrarian voice but someone with Lindsey’s experience would overwhelm the consensus ideologue named Jerome Powell Lindsey is the proverbial bull in the china shop, although very measured in his thought. In going back over some of Lindsey’s previous speeches and thoughts I found this NUGGET which OUGHT to give the Trump White House pause in selecting Larry Lindsey:
In a transcript of the September 24, 1996 FOMC meeting, Lindsey voiced concern about the robust prices in stock and real estate prices in the Hamptons, New York and Connecticut. In seeking to curtail excessive optimism as reflected in valuations of “… highly speculative stocks” led Lindsey to this view: “I can attest that everyone enjoys an economic party. But the long-term costs of a bubble to the economy and society are potentially great. They include a reduction in the long-term saving rate, a seemingly random redistribution of wealth, and the diversion of scarce financial human capital into the acquisition of wealth. As in the United States in the late 1920s and Japan in the late 1980s, the case for a central bank ultimately to burst that bubble becomes OVERWHELMING (emphasis mine). I think it is far better that we do so while the bubble still resembles surface froth and before the bubble carries the economy to stratospheric heights. Whenever we do it, it is going to be painful, however.” (Full disclosure: Lindsey did vote with the majority even after voicing his concern. The only dissenting voice at the meeting was Gary Stern of the Minneapolis Fed as he wanted an immediate rate hike. But Lindsey’s five-year prediction about the end of the bubble was prescient.)
The freewheeling Larry Lindsey will be too much for Trump and Jay Powell, but for the preservation of capitalism Lindsey is an ideal choice … For FED CHAIR. If Lindsey does get appointed to the Fed my first conjecture is that it will make stocks stall and the DOLLAR rise.
Tags: 2% inflation, Fed, FOMC, infrastructure spending, Jerome Powell, Larry Lindsey, tax bill, yield curves
January 3, 2018 at 4:48 am |
Larry Lindsey made these comments 3 months before Alan Greenspan’s “Irrational exuberance” phrase was uttered. Yet both went along with the consensus that created the Dot Com bubble and subsequent crash. Speaking loudly but carrying a small stick was not what Teddy had in mind for good policy. You need coulyones in standing up to your peers and 1996 was Lilliputian compared to what we have today.
The 800 pound gorilla is the global debt which keeps growing and is masked by historically low rates. Look out when mighty King Kong decides to climb to the top of Broad and Wall.
January 3, 2018 at 5:12 am |
Asherz–yes you are correct but as i pointed out Gary Stern dissented but Lindsey stood tall in the IRAQ War debate about costs and he paid the price which tells me a great deal about how we learn—-I still believe him a hard money advocate and when I read those transcripts the dominance of greenspan was evident–Asherz I have met Jerome Powell and he is no Alan Greenspan and Lindsey is no Stan Fischer,Lindsey would be too strong a pick for this Trump Fed
January 3, 2018 at 7:39 am
Yra- You are certainly right that Lindsey is no Greenspan or Fischer. But he can’t hold a candle to a Paul Volcker. Where do we find such as this nanagenarian who understood markets beyond the theoretical ivory tower and acted on his beliefs.
January 3, 2018 at 7:59 am |
They’re unconcerned about government debt and those of us wringing our hands about that or a pending sovereign debt crisis are apparently wrong. Here at the annual New Year BOAML conference in Hong Kong, Mark Yusko and some others assured us that policymakers are already preparing for the government debt jubilee scenario. “Could happen on any given Sunday”. Like those Sunday night announcements by FDR, Nixon and others. Indeed we’re seeing more “research” papers discuss the merits of central banks buying up government debt and then canceling it. It’s gradually becoming a more mainstream, credible policy “solution”.
January 3, 2018 at 8:37 am
David–you are definitely attuned to what I am reading in which the debt on the books is turned into perpetual debt and if we return to Bernanke et al at the beginning of QE when asked about an exit strategy–there was let it run off–or keep replenishing the stock pile.But of course it raises the question about how does the ECB deal with this–the Germans will go ballistic.But you raise the major existential question and let’s also measure what the SNB has done by buying equities
January 3, 2018 at 9:02 am
DR-None of these geniuses is looking at the big picture. Total global debt is about $240 trillion. About 325% of Global GDP. Government debt is not an insubstantial portion of this and non-governmental debt will also be largely in a precarious state.
When Central banks buy government debt and cancel it, cash is returned to the sellers. Many many trillions. What will a loaf of bread cost? You will need a wheel barrel to go to the movies. Think Germany 1923.
January 3, 2018 at 2:40 pm
“When Central banks buy government debt and cancel it…”
They’re well paid, and it’s secure work if you can get it.
January 3, 2018 at 5:43 pm
Well your gov’t wants a weaker dollar (careful what you wish for) and policymakers want more inflation higher for longer, so expensive bread will be an indicator of policy success, just like expensive stocks. No problems for the investing class because they’ll be protected with Dow 60K+
Besides, Bernanke proved that QE isn’t really inflationary. So stop worrying and instead embrace the jubilee. Heck, even the name “jubilee” sounds fun, so how can it not be a good thing?…lol
January 4, 2018 at 4:48 am
^ I jest of course about the QE. More seriously, another thing to keep on our radar per Mark Yusko is US tax receipts, which are falling again and likely to continue to fall with US tax cuts. When the government faces funding pressure, rather than cut spending expect it to instead cut interest rates and/or devalue the currency as has historically been the case since Rome and before. Lacy Hunt and David Rosenberg are at the BOAML conference in HK too, saying that inflation will surprise to the downside and bond yields will fall (further flattening and/or inverting the US yield curve). These considerations would fundamentally be dollar negative. Technically, IMO the dollar remains in a cyclical downtrend and the next key level of resistance for EURUSD is currently 1.24 (then 131) which is likely where that pair is headed before it might (I said might) meaningfully reverse. As painful experience has taught me that key technical levels usually get touched eventually regardless what you think of it fundamentally.
Also of interest here is the Chinese perspective. At last year’s BOAML conference in HK, private Asian economists were certain that USDCNH would fall in 2017 while US managers were sure the yuan would devalue instead. But a key metric used by Chinese economists is private economic indicators, because everyone knows the PRC publishes misleading economic stats unlike in the West (lol). A year ago, the PRC government stated growth in China was 6.5% but the private indicators (which track lots of things like cargo, electricity usage, etc) stated growth was really 11.5%, so they expected this huge strength to spill into FX and western Europe. Now the Chinese government states China growth is running at 7% but the private indicators suggest it’s really double that. So although State Council has final say on monetary matters, we should take Zhou’s warnings about a bubble and debt seriously (he wouldn’t have spoken out publicly if Xi was philosophically opposed). Expect China to tighten and deflate along with the consequences of that. Perhaps 2018-19 will be a mirror image of 2016-17?
January 4, 2018 at 10:59 am
David Richards–another solid series of posts.Much to think about and the area of Euro resistance I find similar and it dates back to july 23rd,2012 the key week for draghi .The Chinese yuan is surprising many and I remember and will repost the hit I did with Santelli in February 1st,2016 after many large global macro came out over that weekend and said the Yuan would devalue by 30%—I opined that if they were right it would be better to own gold because the impact would be deflationary and cause the central banks to panic–also said to buy bonds as a YUAN devaluation of a 30% magnitude would be extremely deflationary
January 3, 2018 at 10:31 am |
Yra,
How can the SNB continue with these neg. short term int. rates without turning the entire country into an “Orange County” ?
January 3, 2018 at 11:47 am |
Trader–no problem being Orange county as it is trading fiat currency for real based equities—think Apple so it is busy making money even as investors in swiss debt get financially repressed–great deal if you can get it,sort of like Buffet lending money to Goldman sachs in the middle of the GFC