Notes From Underground: Jay Powell’s Coming Out Party

There are several important areas for discussion but first I wanted to post a podcast from the Financial Repression Authority that I participated in last Wednesday with Jim Bianco and Peter Boockvar. Pour your libation of choice and have a listen. Please post any questions or points on information on the blog in order to stimulate a discussion that creates potential profitable trading ideas.The moderator Richard Bonugli does a great job of provoking discourse but allows the conversation to freely flow in search for high quality dialectic. Enjoy.

***Last week the ECB released the minutes from its January meeting. The Financial Times ran the following headline: “ECB Minutes Highlight Policymakers’ Fears Over Currency Wars.” (Remember, this was in response to Treasury Secretary Mnuchin’s comments in Davos.) The ECB meeting took place the day following so the threats from Secretary Mnuchin were fresh in the news cycle and the ECB Board were concerned that the U.S. was “… deliberately trying to engage in currency wars.” As I wrote in response to Mnuchin and Wilbur Ross’ incendiary statements, the Draghi group would raise the issue of G-20 agreements regarding competitive devaluations. President Draghi was strident in his January press conference that the U.S. was violating previous agreements by suggesting they wanted a weaker dollar to boost U.S. global competitiveness. The ECB minutes stressed that “concerns were … expressed about recent statements in the international arena about exchange rate developments and, more broadly, the overall state of international relations.” Mario Draghi has a new addendum to the ECB mandate: “… the state of international relations.”

The bottom line is that concern over a stronger euro provides Mario Draghi an opportunity to prolong the negative interest rate policy and its use of forward guidance. A stronger euro keeps pressure on prices as low-cost imports replace domestic products. The target 2% inflation that President Draghi has portrayed as his “white whale” moves further out on the horizon as the EURO strengthens in response to U.S. policy. In recounting Mnuchin’s comments about the greenback (a weaker dollar benefits the U.S and Commerce Secretary Ross’ comments about sending U.S. financial soldiers to the citadel, suggesting that everyday is a currency war), I wish to note a New York Times op-ed from May 21, 2011 written by Christina Romer, then-Chairwoman of President Obama’s Council of Economic Advisers. Titled, “Needed: Plain Talk About the Dollar,” Professor Romer reiterated a cab ride she shared with former Treasury Secretary Larry Summers. Summer was prepping Romer for her interview for the CEA job

Summers: “How do you feel about the dollar?”

Romer: “The exchange rate is a price much like any other price,and is determined by market forces.”

Summers: “Wrong!” [Larry boomed]. “The exchange rate is the purview of the Treasury.The United States is in favor of a strong dollar.”

Christina Romer defended her answer to Summers by offering up myriad of situations where both a strong or weak dollar would be beneficial to the U.S. economy. There is not comprehensive answer able the value of the U.S. currency. She noted that while policymakers posture a strong dollar the executive and legislative branches pursue a weak dollar policy against the Chinese renminbi. So again, the idea of a strong dollar policy is flawed. Romer summed up her argument: “To say this openly risks being branded not just an extremist but possibly is un-American. Perhaps it is time for a more adult conversation. The EXCHANGE RATE IS THE PURVIEW OF MARKET ECONOMICS,NOT OF THE TREASURY OR STRONG-DOLLAR IDEOLOGUES, (emphasis mine).

For President Draghi, the bottom line is that a strong euro allows the ECB to pursue negative interest rates and QE for longer than most pundits believe. Draghi stressed this view again Monday when he addressed the European Parliament. While growth is robust the 2% inflation target remains elusive. Draghi, like Yellen, does not comprehend why but offers up the usual concerns about a strong currency, globalization hampering wage growth and issues of secular stagnation due to technology and demographic trends. There may be some ECB hawks but Mario Draghi is certainly not in that KETTLE. He concludes with his view on monetary policy: “In fact, the evolution of inflation remains crucially conditional on an ample degree on monetary stimulus provided by the full set of our monetary policy measures: Our net asset purchases, the sizeable stock of acquired assets and the forthcoming reinvestments, and our forward guidance on policy interest rates.”

***On Tuesday morning Jerome Powell testifies to the House Financial Services Committee. There were many stories circulating that Chair Powell would suggest that he would be comfortable allowing inflation to run a little hot–about 2.5%–before being reactive. My sense is that there are too many people speaking for Powell. I don’t know what we will hear but I believe that he will differ from Yellen in that he will allow markets to act to set prices before his Fed will rush to curb and fall in equity prices. It will be refreshing to have the Federal Reserve respect markets rather than react in fear to any market volatility. Bernanke set the tone when he panicked in fear of the market’s response to the famed “taper tantrum.” Market-based reaction function is far better than knee-jerk academic oriented responses.

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3 Responses to “Notes From Underground: Jay Powell’s Coming Out Party”

  1. asherz Says:

    The Hubris of the Central Bankers
    ” There were many stories circulating that Chair Powell would suggest that he would be comfortable allowing inflation to run a little hot–about 2.5%–before being reactive.”
    The Panic of 1907 led John Pierpont Morgan and friends to eventually create the Federal Reserve in 1913. We have witnessed how those in charge of monetary policy have been prone to get involved in an increasing way in determining market pricing. The crash of 1987 resulted in the creation of the Working Group on Financial Markets or as is affectionately known as the Plunge Protection Team. We have reached the stage that serious “corrections” brings out the cavalry. The “volatility” some weeks ago with a 10% drop in equities probably brought the Team out in full force. Markets cannot be allowed go down with abandon. The bear is an animal that has cross hairs on his back.
    Can the financial central planners prevent panics and collapses indefinitely? The markets are bigger than those who believe they can determine market outcomes. The ski hamlet resort in Davos attended by Mario Ernst Stavros Blofeld Draghi and associates think that “whatever it takes” is in their hands. It may be for a number of years, but ultimately they will be overrun by overwhelming market forces. The DJIA in 1929 took until 1954 to regain its comparable level. Greenspan/Bernanke /Yellin and now Powell have kicked the can down the road for a good number of years. But what we now see is a world tottering with top heavy debt loads because of their policies that will have serious effects on Capitalism and Benjamin Graham’s weighing machine. What they all do not understand is that bear markets are a way to correct the excesses of “irrational exuberance” (ironically coined by Greenspan himself).
    Let’s hope that the damage is not beyond repair.

    • yra harris Says:

      Asherz—this is a beautifully written post.It sums up the last 25 years of central bank reaction/function.Let’s hear if Powell is suffering from Stockholm syndrome or is more of a Solzenitsyn seeking knowledge outside the gulag of forced thought—can he escape the model based thinking and cloak himself in a Nehru jacket to overcome the domestic biases of Nairu

  2. Richard H Papp Says:

    Technically, there were 3 9 to 1 or worse downside volume days in 9 trading days on this 10 % NYSE correction. This resulted in 85% of NYSE equities below their 50 day Mv. Av.($NYA50R). That created a very short term oversold condition which caused a snap back rally. The move up had several 8 to 1 upside trading days.
    Reminds me of a quote from “Reminiscences of a Stock Operator”
    “Stocks are manipulated to the highest point possible and then sold to the public on the way down”

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