Notes From Underground: Powell Seeks to Reestablish the Authority of Markets … Maybe?

I am positing this idea because I think it’s critical to current valuations of various asset classes. The nine-year rally in the U.S. (and to some extent the global equity markets) has stretched valuations as ultra-cheap money has pushed investors into taking risks larger than what many money managers and retail investors would do “normal” circumstances. This was ultimately the Bernanke plan the former chairman laid out at Jackson Hole in 2010 (simplified in Bernanke’s Washington Post op-ed as the PORTFOLIO BALANCE CHANNEL). The long-term problem for investors is that Bernanke and Janet Yellen were terrified of market reactions whenever they desired to halt the massive QE programs and their beloved use of FORWARD GUIDANCE.

When Bernanke in 2013 floated the idea for slowing asset purchases, the markets reacted with the infamous TAPER TANTRUM. Bond yields soared and equity valuations immediately dropped almost 10 percent. In response, the FED immediately walked back its plan to tapering its QE program. Because of Bernanke’s and Yellen’s fears about the market, the Fed helped inflate global assets via rapid debt expansion. What has compounded the problem is that the ECB and BOJ have both followed the Bernanke playbook.

The difference that Wall Street is failing to appreciate is that Powell is not an academic and wedded to economic models. Chairman Powell is an experienced market participant and respects the signalling mechanisms that MARKETS provide instead of theoretical probability-based models. Jay Powell is a man of PRAXIS.

It appears that Powell will see how far he can allow markets to correct before it is deemed too much. For the past week, the comments from FED presidents and governors were filled with hawkish overtones even as the BOND and EQUITY markets were in the middle of serious downside corrections. Powell warned that markets had a “long way to go to get to neutral.” Wall Street assumes that NEUTRAL is a relationship with the DUAL MANDATE and the FED will raise rates to a level that neither results in higher unemployment or lower inflation. In my opinion, Powell may be referring to a neutral rate that conforms with a long-held view of a historically important of a REAL YIELD of 1.5 percent on short-term money. If inflation is 2 percent, the overnight rate may well be 3.5 percent. Defining the neutral rate will be of paramount importance for understanding the market-directed Powell Fed.

Be alert that the more the equity market dropped this week the more HAWKISH the FED comments. It is apparent that Powell is as much concerned about inflated asset prices as the threat of incipient inflation to consumers. Wall Street logic says the FED is raising rates so as to be able to have ROOM TO CUT when the next economic slowdown arises. Would it follow that if equity prices fell then the next rally would come from lower prices, thus preventing a possible bubble?

Powell is certainly providing a different format to what the crowd had become accustomed to over the last nine years. It seems this group of governors doesn’t fear volatility nor rational asset prices. Adjust your trading and investing based on a change in the previous accepted wisdom. If forward-looking profits can sustain current prices then the market is priced correctly but if rising interest costs and wages erode record profits the price-to-earnings ratio of the market will adjust, especially as liquidity is drained from the global financial markets.

***Put this on your radar: Over the weekend, there was Reuters story titled, “Exclusive :U.S. Commerce’s Ross Eyes Anti-China ‘Poison Pill’ For New Trade Deals.” The story sheds light on how the Trump administration included a clause in the USMCA known as the non-market country clause. It says: “Under the provision, if any of the three countries in the USMCA enter trade deals with a ‘non-market country’ the other two are free to quit in six months and form their own bilateral deal.”

This is right out of the Robert Lighthizer book as it is a very legalistic attempt to undermine the hated elements of Article 15 of the WTO. The USTR, as directed by Robert Lighthizer, has criticized the WTO of allowing China to circumvent global trading rules by the use of the non-market rules when they have found it convenient. China was granted non-market status in the WTO for 15 years in 2001 in an attempt to open up the massive China market for developed nations’ industries. The special laws favoring China is what Lighthizer has called a mistake. The U.S. is attempting to correct the previous errors that granted China a favorable situation at the expense of mature market economies.

As the U.S. attempt to negotiate bilateral trade deals, Trump’s trade advisors are certainly trying to apply maximum pressure on the Chinese to correct the flaws of the WTO arrangement. When Wilbur Ross was asked if this clause would apply to future deals, he said, “We shall see. It certainly helps that we got it with Mexico and with Canada, independently of whether we get it with anyone else.”

Regardless, the fact that this clause made its way into the USMCA suggests that the U.S. is on the offensive against China in creating a different world trade arena. This is a major victory for the White House and will play well for the issue of trade in the coming elections, at least for those who vote based on trade issues. Lighthizer is one tough hombre who has certainly attracted the attention of Chinese leadership.


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11 Responses to “Notes From Underground: Powell Seeks to Reestablish the Authority of Markets … Maybe?”

  1. Trader 1 Says:


    Now that USMCA is finished with the ‘Non Country’ Market Clause do you have any thoughts on China next move?? Trump indicated in his last rally last night that India is calling him to do a deal. If all of this comes together does this put China in a box??

    (think back to all of the talking heads claiming if Trump pulls out of TPP then USA will be left out of trade – Is this trade thing coming together with Lighthizer where China will be left out??)

    • yraharris Says:

      Trader–China will not be left out–they will just have to adjust and negotiate or attempt to negotiate and buy some time to see how the world adjusts—-but this Lighthizer team is a very solid opponent for the Chinese.The Canadians were forced to learn this

  2. Rohr (Alan Rohrbach) (@MacroMeister) Says:

    Great focus on Pragmatic Powell. The Atlantic Festival interview ( was very refreshing in NOT bringing in academic blather for the first time since Paul Volcker.

    Yet that bigger issue with China is a very tough nut, because so much of the economy is still tacitly controlled by the PLA and its cronies. Getting them to give up the very profitable/low overhead forced IP sharing will be very hard, and is way beyond anything that can be accomplished with reciprocal tariffs.

    The real failure during the dummy Bush and Obama policy eras was the idiot Western business people who agreed to such an asinine arrangement in order to access a Chinese market the Chinese were always going to steal back. They should all be beaten to within an inch of their lives (metaphorically of course,)

    The other fronts to watch are potential Chinese restrictions on strategic exports (components and rare earths) and the PLA controlled military strategy… China still wants to turn the South China Sea into a Chinese lake. And countering that violation of freedom of navigation may still require some overt military action. So, scary and not just a trade confrontation.


  3. asherz Says:

    Comments today are right on.

    First, we still need to see if Powell under extreme pressure to come, is a 6’7″ Volcker or a 5’8″ Bernanke. It’s too early to pass judgment.

    Second, when looking at valuations such as P/E, use the Shiller CAPE or better yet the Hussman adjusted CAPE. We have recently passed 2000 and 1929 valuations and far beyond 2007.

    Those who mocked and made light of Lighthizer and Navarro methods, including the generally perspicacious Wall St. Journal editorials, will soon see the error of their ways.

    China, the ultimate target, will not go down without a serious fight, and that verb may be demonstrated literally as well as figuratively. When boxed in, the Art of War shortens its time span.

    The last 10 years of relative calm and prosperity engendered by our monetary alchemists, may see the Faustian deal they made come back to haunt us in the next decade.

  4. Chicken Says:

    Would the inverse perhaps be called the portfolio imbalance, counterbalance or rebalance channel? 🙂

    • yraharris Says:

      Chicken–it would be called Market Centered Prices—versus Central Bank Centered Prices–the market is suffering some withdrawals from the high of negative interest rates or negative real yields–although the drug is still prevalent in its use in other parts of the world

  5. Arthur Says:

    James Grant
    in conversation with
    Stanley Druckenmiller

    • Chicken Says:

      Druckemiller seems to be describing a vulnerability of algorithm activity. I hope he took advantage of the pharma deluge.

  6. yraharris Says:

    Arthur and Chicken–thanks for the post–be back soon–just enjoying some time chilling and absorbing the news and putting it altogether as I celebrate my family

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