Notes From Underground: Chairman Powell, Ask the Wizard for Some Courage

The FOMC issued a very bland statement on Wednesday after its two-day meeting. Why did they bother convening for two days to deliver a policy statement that they phoned in last month. In my opinion, Jerome Powell missed a perfect opportunity to flex the FED‘s independent muscles by NOT RAISING RATES. The recent GDP data, inflation measures and robust jobs market provided ample evidence that the market is in need of another interest rate hike.

The equity markets’ resilience in the face of increased TARIFFS indicates that real yields are still too low as money searches for a return above the established inflation levels. In July, President Trump tweeted that he was opposed to the FED‘s current rate rising efforts but he was LETTING THE FED DO ITS JOB. This OUGHT to have prompted the Powell FED to exert its desire to drain some of the froth out of current financial conditions.

Chairman Powell, which of the following provided the greatest fear for you:

The fear of the Bernanke /Yellen policies of not roiling the markets?

This is a legacy that is fostering a bubble in global financial assets. Money kept at ridiculous low levels for too long creates a mispricing of all sorts of debt. Emerging markets and foreign borrowers have gorged on cheap loans as central banks have kept real yields far too NEGATIVE for far too long. The question is whether the FED is a prisoner of the markets or if the markets are captured by the famed Greenspan PUT.

The prescient economist Bill White posed the question to central banks and financial ministries in 2006: DO YOU LEAN OR CLEAN? Wednesday’s failure to raise rates suggests that the FED remains in the industrial cleaning business. The problem with being a maid to the economy means that the next recession will cause a serious shortage of economic options as the FISCAL DEBT rises to dangerous levels, especially as debt servicing costs as a percentage of the budget limits Congress’s ability to embark on substantial stimulus programs.

Did the Trump tweets make you nervous that the President will make you a target of his capricious actions of creating targets for public acrimony?

One thing the Russians and others have taught us is actions have a very short shelf life and a FED RATE HIKE would have dissipated as the global vacation season gets underway. Recent jawboning by Larry Kudlow, President Trump and Treasury Secretary Steven Mnuchin should be treated as oral agreements (not worth the paper they are written upon).

Chairman Powell, you should have stood firm in face of the taunts from the cyberspace bully and raised rates. Had the Fed raised interest rates and spurred a significant rally in the dollar, we would have had to listen to White House jawbone the greenback lower to counteract the overactive FED as it was undoing all of Trump and company’s good work.

It is time for the Fed chairman to draw back the curtain that protects the Great Oz from challenges to flawed fiscal policy. Courage can only be found within yourself for as the LION made us aware. WHAT MAKES A KING OUT OF A SLAVE? COURAGE. Until the FED exercises COURAGE it will be a slave to markets and/or political bullies.

On Thursday we get Mark Carney and the Bank of England. This will be an issue of a BRAIN as the BOE has to confront its erroneous forecasts about the economic outcomes of BREXIT.

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17 Responses to “Notes From Underground: Chairman Powell, Ask the Wizard for Some Courage”

  1. AZRondo Says:

    I heard long ago and then read Thucydides to be certain of my attribution: The Secret to Happiness is Freedom and to Freedom, Courage. There are different freedoms. When one acts in truth, it is a freedom that no punishment can take away. I know. I have lost jobs by saying truth that others in power did not want to hear. I left and moved on. They continued, and seemed to live in fear and anxiety.

    Do the right thing (which is almost always obvious among choices). Speak truth. Seek wisdom.

    Live by Proverbs 17 (or pick another fav).

  2. Stefan Jovanovich Says:

    Trump is already actively campaigning for his Congressional Party; and he knows that immigration/”the wall”/MS-13 is a winner. He also knows that he can carry the big stick on the issue of economic borders – i.e. reciprocal tariffs – but only if he speaks softly on all questions regarding the Federal Reserve.

    So, I think it is only fair that we end any tallies on Tweets; the Beer Bet is a one-way trade that Yra has not chance of winning no matter what happens to the stock and bond markets. Trump will let Yra and others complain about what the Fed does and does not do. If things go badly and there is another 1903 Rich Man’s Panic (without any Presidential assassination, please God), Wall Street can take the blame, just as they did then in Keppler’s cartoon.

    • yraharris Says:

      Stefan–you are stretching my depth.But that is what this endeavor is all about.Thanks for your comments and hope my readers are pushed to learn more as you provide deep perspective

      • Rob Syp Says:

        For those of us that “are not the smartest knifes in the drawer” can Stefan, Yra or anyone else please tell me the jist of “a one-way trade that Yra has not a chance of winning no matter what happens to the stock and bond markets” means


  3. asherz Says:

    Powell will follow in the footsteps of Greenspan/Bernanke/Yellin and will do his utmost not to collapse the mother of all debt and equity bubbles, created by his predecessors. He will be Bert Lahr as he puts on the mane of the Cowardly Lion. After all, who wants to be remembered in history as the exponential Herbert Hoover ?

    The Fed Chairmanship has been a game of musical chairs. No one wants to be playing that game when the music stops. Five trillion in unfunded corporate pension funds? A small amount compared to unfunded Federal entitlements which runs in the hundreds of that Zimbabwe number. A safety net with large holes

    With over $21 trillion in national debt, with an $800 billion deficit or higher for next year with trillion dollar annual deficits to follow, with Treasury issuing a trillion dollars in new debt this fiscal year, with interest rates rising and is the fastest growing part of the national budget, it brings to mind Everett Dirkson who is reputed to have said, ” A billion here, a billion there and pretty soon you are talking about real money.” Except change the B to a T.

    I’m left with one question. Why would anyone want to be the Fed Chairman?

    P.S. Is there any doubt that we will have a QT becoming QE at some point? Beware long term dollar or any fiat currency investors. Traders however, enjoy.

    • yraharris Says:

      Asherz–i would love the job.Cannot be fearful in times that require leadership defined by action.Powell missed a great opportunity today.

    • David Richards Says:

      asherz you pretty much nailed it. I can think they want the Fed head job only for the lucrative consulting & speaking fees afterward. Meanwhile praying things don’t blow up while they’re in the big chair. No doubt Mario is praying for the same before he leaves next Oct.

  4. David Richards Says:

    Yra, what else would we expect? Powell has been a consensus dove for years. And as for the big FISCAL DEBT rising to dangerous levels, to paraphrase Powell, “We have a printing press”. Thus the Fed doesn’t really need more rate hikes or room to cut. Plus with Larry “the father of negative interest rates” Summers coming on-board, they’ll have plenty of room to cut down to negative infinity.

    For the traders, this summer has seen the most narrow range in the dollar in four years since summer 2014. Narrow range-bound trading usually precedes a big move (think major breakout from a wedge or triangle). Four years ago, it burst out as a big dollar surge. This time, with the narrative a-flutter about a stronger dollar (laughably so IMO as DXY still languishes almost 1000 pips below its level twenty months ago) and traders overwhelmingly committed long the dollar, the pain trade dictates that the dollar triangle should ultimately break lower. Me thinks like asherz above, the Fed doves backtrack and thereby catch most by surprise as QT morphs into QE.

    To wit, superb dollar analysts Luke Gromen and Julian Declercq have in gory detail (fundamentals) separately forecasted a coming dollar collapse, eventually down into the 50-60 level on DXY, essentially based on the large & growing US twin deficits and losses from the trade war and a capital war (as per Ray Dalio). That dollar target level wouldn’t be too far-fetched in the context of Elliott third and 5th waves down (my words, not theirs), meaning a big down-up-down move to come after the current dollar counter-trend recovery ends (if it hasn’t ended already).

    Trump et all will be thrilled should the dollar collapse again, as that should help support US exports and US stock prices (yay),at least in nominal terms like in 2017, but not necessarily in other FX terms after-tax. And sadly, Joe Average will continue to lose financially as a falling currency equates to a falling standard of living, all the more so with this rising inflation that the Central Bankers have wished for – remember the wise quote, “careful what you wish for”.

    • David Richards Says:

      Will there be follow though on Friday’s reversals in metals (up) and dollar (down) on the NFP miss? US Citi surprise index showing more negative surprises not unlike Europe before the Euro swooned.

      Some extreme PM and dollar positioning per Friday’s COT data.

      In my last post above, I mis-typed Juliette Declercq as Julian, oops. Julian is Julian Brigden who with Raoul Pal remain dollar bulls as they’ve long been, and they make some compelling arguments for their USD bullishness based on their outlook for major risk-off ahead, safe haven flows to USD and an international dollar shortage (which I can’t understand because last time the US just digitally produced more $$ and down it went).

  5. Rob Syp Says:

    Stefan’s comment so discombobulated me couldn’t even write what I was trying to say


  6. Stefan Jovanovich Says:

    The one-way trade was an adhesion contract for a derivative that I offered Yra (and presumed to have his tacit acceptance). He had suggested that Trump would be Twitter storming Powell between now and election date in November; I thought the probabilities we’re that the President would focus on borders and tariffs and leave the Fed alone.

  7. Richard H Papp Says:

    To AZ Rondo,
    Thanks for the Breathe of Fresh Air. Yes, the Fear of the Lord is the beginning of Wisdom and to depart from Sin is Understanding.
    Carry on!

  8. Chicken Says:

    It’s based on the data, of course!

  9. David Richards Says:

    Did the Fed have the NFP miss during the FOMC meeting mere days before the NFP release to the public yesterday?

  10. Stefan Jovanovich Says:

    The CME has a wonderful link that has the Historical First Trade Dates for its products.

    Commodity futures produced a miracle. By giving greed and envy equal standing with thrift and prudence, they allowed asset inventories become financial claims that could be instantly cleared into cash.

    Now, with interest rate and FX futures, financial claims themselves can be discounted. But it still seems to trouble almost everyone that there is no final “money” – at the end of the clearing process. If the Pits have gone silent, the screaming is now louder than ever; but almost none of it is about prices and dates and quantities. The national debt is now the subject of endless sermons, even as the actual IOUs are pegged to ranges controlled by central banks and direct dealers in bonds have gone the way of independent grain elevators.

    Mr. Powell is not a “believer” in the notion that sovereign debts can be endlessly extended; he is simply observing what is now a fact of life. “Default” by any national Treasury is impossible. Even Zimbabwe is able to pay off its loans. Powell may be the first central banker and Mr. Trump the first President to understand that interest rates, like the price of wheat, are important inputs; but they can be safely left in the hands of the actual markets. What both men seem to understand is that the question sovereign authorities do not want the markets to answer is this: what will the loan pay-offs be worth in a currency not printed by the debtor?

    The FX “market” has yet to see anything that matches “the chaos” (sic) over commodities and interest rates that Yra, Mr. Santelli and other clever, honest and wise veterans have seen. I look forward to seeing what our host, his friend and others now have wrought in making money itself the financial asset to be discounted.

  11. Arthur Says:

    Japanese banks’ foreign exposure may threaten financial stability elsewhere.

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