Notes From Underground: Seasons Greetings From 1850 K Street

On Wednesday the most discussed FOMC meeting in years will take place. The FED has put itself into a box through its use of forward guidance and of the DOT PLOTS to direct investor sentiment. By skipping a rate hike at its November 8 meeting Chairman Powell put the burden on December with a heightened sense of a rate rise as it has a scheduled press conference. There is a murderers row of financial heavyweights arguing for the FED to ABSTAIN FROM A RISE IN RATES and wait for more data to ascertain whether the equity markets are signaling a genuine concern on economic problems, or are merely repricing risk that had premiums WAY TOO LOW during the halcyon days of harmonized QE. As the FED shrinks its balance sheet, the ECB is finished with liquidity. Once you add the BOJ dancing to the tune of a decimated bond market, global liquidity is being restrained.

On Monday, Stanley Druckenmiller and Kevin Warsh wrote an op-ed in the Wall Street Journal titled, “Fed Tightening? Not Now.” Druckenmiller is one of the great global macro traders and a voice that needs to be heard, if not obeyed. Kevin Warsh was considered to be FED Chairman by President Trump before Jerome Powell was selected. More importantly, Kevin Warsh works for Druckenmiller and he also has a seat on the G-30. (If you are not familiar with the significance of the G-30 I suggest googling the 30 people who seat on that august body. In his autobiography Keeping At It, Paul Volcker praises the G-30 work but I find it morally reprehensible for the insider information it provides for several investment groups. Regardless, it is a major force in the world of global macro.) The bottom line is that Druckenmiller and Warsh argue that the FED missed its opportunity to be more hawkish many months ago. They wrote, “Given recent economic and market developments, the FED should cease — for now — its double-barreled blitz of higher interest rates and tighter liquidity.”

This has been a major theme of NOTES FROM UNDERGROUND for the past year as it seems the FED doesn’t very comprehend the power of shrinking its balance sheet while raising rates. Do one or the other in an effort to “combat” the wage pressures of 3.7% unemployment rate but not both. In late October, Simon Potter, the executive vice president at the New York Fed and head of SOMA gave a speech in which he maintained:

“I remain highly confident that the FOMC’s framework for the normalization of the stance of monetary policy — both in the overnight market and the balance sheet — will continue to proceed smoothly, without necessary surprise, disruption, or volatility in financial markets. The monetary policy implementation framework continues to provide the FOMC with excellent control over overnight money market rates, and proven to be flexible, including through the technical adjustment, in the face of new developments.”

Has recent increased market volatility caused Chairman Powell to question the efficacy of the double-barreled approach to normalization? If the answer is yes then it will be a very dovish FOMC even if the FED FUNDS rate is increased 25 basis points (but it will really be more like 20 basis points). As I wrote Sunday night, pay attention to FED concerns over economic headwinds arising from a potential global slowdown because the FED traditionally gives little concern to global events in its statement. The more words dedicated to global headwinds the more dovish the Fed is likely to be. There is a press conference 30 minutes after the FOMC statement so I urge patience to allow levels of low risk to present themselves.

If the Fed is dovish in the DRUCKENMILLER-WARSH sense I will be putting on steepeners, selling the DOLLAR and buying precious metals against all fiat currencies. If the FED is suspect about its own QE exit strategy, think about the difficulty facing the ECB, BOJ and the BOE, not to mention the Swiss National Bank although the SNB has bought other nations equities with its newly printed FRANCS making them the ALCHEMISTS of the last thousand years. Printing currency and exchanging it for shares in APPLE stock, wow, Parker Brothers could finally replace monopoly: Global Capitalism. The FED will be reticent to mention the STRONG DOLLAR for that is the TREASURY‘s bailiwick but the other concern will be about global dollar denominated debt impacting emerging markets, concern about Brexit and the instability in Europe as Italy, France and Brussels confront political issues with financial impact.

There are many ways for Chair Powell to walk back well constructed hawkish forward guidance. If this wasn’t enough, Thursday brings interest rate decisions from the BOJ and Bank of England. All this pressure in HOLIDAY-THIN MARKETS.

Peace to all and, please, no White House tweets. But be assured that if Chairman Powell defied the probabilities by not raising the FED FUNDS rate, Trump would be calling it a victory and a wonderful Christmas present for Americans. Get your technical levels in place so you are aware of risk tolerance on what is sure to be a volatile afternoon. If the statement is DOVISH watch the 10-year and 30-year bonds to see if a rally in the futures fail by the end of trading. That will be my indicator for a coming steepening.


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9 Responses to “Notes From Underground: Seasons Greetings From 1850 K Street”

  1. asherz Says:

    Life works in cycles. Night becomes day, winter becomes spring, death follows life. The Greeks wrote about those who would defy inevitabilities.
    The Fed in the last 10 years has tried to do so. It adopted a third mandate to protect against market crashes and recessions. But the cost of the cleansing action of economic purges has only delayed the inevitable but at a severe cost. It started with Greenspan in 1998. What would have been a mild recession now after 20 years of foot on the pedal has built up a global debt/GDP ratio that is unsustainable. Some on this blog felt that Jay Powell was the Iron Man and would stand strong in beginning to deflate the bubbles. I argued otherwise. The pressures would be too great.
    Powell may raise today (probable) or not but in any case we are no longer “a long way from neutral.” That statement only stood up for a few weeks as market “volatility” (why is that word never used in meltups?) and White House slings and arrows has gotten to the Bert Lahr imitator of Zeke the cowardly lion in the Wizard of Oz.
    Seven Years of Plenty inevitably leads to Seven Years of Famine. Those who would defy that outcome do no favors for their constituents. In the Joseph story the people in Egypt had to sell their possessions and ultimately themselves to survive. Only Joshua could make the sun stay still..

  2. AZRondo Says:

    Well, I saved up for 30 years, and due to the machinations of Fed, and laws of land of mandatory distributions with taxes that include what was saved, I am worse off. But always optimistic on my own account, give in tithes at least equal to what caesar takes.
    Joseph, following true has hard times, but always staying true comes out on top and while doing so, helps others…

    What I am not clear on is if the Fed is dovish, and if rally in the futures fails (why?), how does that infer steepening? and Dollar weakening?

    Not an economist – just a Mathematician-Engineer-CompSci-Ops Research guy.

    • yraharris Says:

      AZRondo–Thank you for the post –if the FED gives up its search for the neutral,however it is defined with a massive growth in the deficit it will call to question the credibility of the central bank.I continue to pose this question—-why would you buy long duration U.S. debt when this year’s deficit is over a TRILLION $ in a time of the proverbial full employment?Some pundits keep invoking the word recession on the horizon–i wish they would define what they mean and being you are a man of genuine science you should too–but if the US economy slows the DEFICIT will rapidly increase as the government would serve its Keynesian mandate and search for ways to increase demand in the time of economic fragility–lean years if you would—unfortunately they did not follow Joseph’s dream or Keynesian dictate about storing wealth during robust times–would you really want to own more US drbt following that logic?Would you want to also purchase more currency of the realm for storage purposes?Remember in the Joseph story all denizens of the realm had their wealth conficated except for the priests—the more things change–or as the YELLOW VESTS say—“plus ca change ,plus c’est la meme chose”

  3. TripleNet Says:

    Yra, you should write a book on macro trading!

    What do you make of the JGB funkiness last night?

  4. yraharris Says:

    Triple–funky how??Don’t follow or I may have missed something

  5. Don H Says:

    After testing the Feb. lows, and appearing to find a bid; the only question is whether the machines decide on 2600 and a push toward ending 2018 in the green or…

  6. TripleNet Says:

    There were some large price swings in JGB this morning although we ended up unchanged. Japan Securities Clearing Corporation issued an emergency margin call for JGB futures.
    You could argue that a flattening yield curve is the best market indicator of fear of a forthcoming hawkish Fed mistake. And it looks like fear of such a thing has just intensified with 2/10 close to being inverted…

    • yraharris Says:

      Triple–just a situation created by the BOJ destroying the signaling mechanism of its bond market—volume is always thin and many days it trades by appointment only

  7. Chicken Says:

    Just as it’s unwise to bring only a knife to a gun fight, it’s always more effective to brandish a double barrel as opposed to a puny single barrel.

    God forbid if wages were to increase, ever!

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