Notes From Underground: Jerome Powell, Meet Jerome Kerviel

The die has been cast as the U.S. 2/10 curve did the unthinkable. It inverted. This cause panic among the talking heads, who scoured the earth for analysts to give purpose to the bogeyman of bullish equity market pundits. The financial television media interviewed analysts all day, who explained ad nauseam why an inverted curve is truly different this time as it mainly reflects the desire for foreign investors to send their savings to the welcoming shores of the United States.

This is the Ben Bernanke formula of a glut of global savings being responsible for the increased demand for U.S. government securities. However, take a look at the sovereign debt of the unloved European nations, Japan and Switzerland because their yields keep plummeting to new lows. The markets are pushing rates lower for it is the trade with the least resistance since slowing growth, plus softening asset prices in equities and commodities helps sustain the continued upward push in bond prices.

Then factor in the ECB, SNB and BOJ competition for what is currently a limited amount of supply and it pushes rates lower. The exception may be the U.S. as the Treasury is projected to issue around $750 billion of bills and coupons by the end of the calendar year. Part of the reason for the flattening of the U.S. yield curve is the increased supply, particularly T-BILLS, being issued to plug deficits and replenish the Treasury’s cash balance.

The deluge of supply should put upward pressure on short-term rates as dealer balance sheets are stuffed. At the Fed’s July FOMC meeting, it appeared that the central bank’s rate cut was an effort to steepen the curve, but of course, Chairman Powell managed to undo that when he uttered the words “MID-CYCLE ADJUSTMENT.” The markets interpreted the cut as a one-off reduction, which immediately flattened the curves, with the 2/10 falling 8 basis points by the end of the trading session.

The curves have been BULL FLATTENING since August 1, led by a dramatic drop in the long-end. If Powell was concerned about a curve sitting at 22 basis points HE OUGHT to be very concerned about Wednesday’s inversion.

When not talking about yield curve inversions, analysts have opined about the possibility of the Fed executing an intermeeting rate cut at the annual Jackson Hole symposium. This would be a GIGANTIC mistake as it would put the academic-centric conference in the spotlight for the wrong reasons. Think back to August 2010 when then-chairman Bernanke announced QE and the portfolio balance channel in an effort to awake the animal spirits. Let’s not make Jackson Hole the go-to place for Fed policy shifts. Let it remain an academic gathering for the world’s theoreticians.

Instead, CUT RATES THURSDAY and do even more to turn the yield curve. Yes, I entered steepeners as I believe an intermeeting cut is an inevitability. Every pundit has a different perspective on why Wednesday’s inversion is an anomaly. But with most of the world in arm’s reach of the ZERO LOWER BOUND, we have no historic precedent to MEASURE THE IMPACT OF CURVE INVERSION IN A ZERO/NEGATIVE INTEREST-RATE WORLD.

Because of this unprecedented situation, Powell should take unusual action. The last time the FED cut rates in an EMERGENCY was January 22, 2008 when it appeared that the European Financial System was on the verge of implosion after French bank Societe Generale incurred large losses in the equity market. U.S. markets were closed for Martin Luther King Day but the FOMC jumped into action by cutting rates 75 basis points to 3.5%.

The FOMC said the following about its decision: “The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth.”

As it so happens, former Fed Chair Janet Yellen has an interview airing on Friday in which she warns of risks to global growth prospects. Jay Powell, you have all the support you need to do an emergency cut of significance, which would remove the FED from the conversation. Push your ego aside and admit you erred in believing that you could continuously execute both “QT” and rate hikes.

As Judy Shelton, the current nominee for Fed governor, warned in an interview with Rick Santelli last week, “IT IS HARD TO BE VIRTUOUS IN A VACUUM.” When I discussed this idea with some people, they thought I was HIGH. However, I think this is a rather sober approach to Fed action. Otherwise, the market will keep pushing the long-end ever lower in yield. The Canadian 2/10 inverted further to negative 20 basis points, which is the flattest level since 1990. You don’t have to be a weatherman to know an ill-wind is blowing.

***There was an article Financial Times from Aug. 7 titled, “US CREDIT CARD INTEREST RATES HIT 25-YEAR HIGH.” The story said the average rate on interest-bearing credit cards topped 17% in May, according to Federal Reserve data, the highest in the 25 years that the central bank has been making the calculation. Weekly data based on a survey of 100 national card issuers found an average rate of 17.8% at the end of July, another multi-decade high. Hmm, that’s quite a spread for Senator Warren to investigate.

Stayed tuned to this issue entering the public debate. It’s no wonder why bank stocks perform so well.

Tags: , , , , , , ,

11 Responses to “Notes From Underground: Jerome Powell, Meet Jerome Kerviel”

  1. Michael Temple Says:

    Great stuff as always. Nothing you say doesn’t not make perfect sense.

    But, I will take things one step further. In the zero bound world that the Fed may soon approach, perhaps Powell may listen to your headings and go One step beyond. Yellen never seemed ready to embrace NIRP, stopping at the zero bound.

    A lot has been written and discussed about the anomaly of shrinking excess reserves in the banking system. QT, after all, has been running for quite some time. Rate cuts, as necessary as they may be, represent merely the cost of money. They don’t conjure up actual reserves. The printing press that will conjure those “reserves” is Mario’s perpetual motion machine of QE.

    Perhaps Powell goes “all in” after this latest mis-step and not only does an Yra Harris emergency rate cut, but he also discusses or even possibly commences actual QE4.

    SP goes ballistic. Dollar goes Splat (which is good for markets).
    And gold goes even more ballistic.

    As I have stated several times now, gold is the “easy money” trade going forward as the culmination/end play of this epochal global bond market phenomenon is going to propel gold to $2000 in 2020, and way beyond in the dark years that follow.

    CME’s raising of gold margin rates hardly dented gold prices today. I note that development quite well. I don’t think this gold rally is fueled by weak handed Johnny-come-latelies.

    Rather, I believe there are some truly Big Boys waving in whatever the HFTs and algos are spraying with their selling games.

    I am looking for QE to re-enter our lexicon any day now/week now.



  2. Michael Temple Says:

    And now we have UST 30 yr yielding 1.98%

    2 bp below the FFR lower bound.
    Is it any wonder gold is up another $7 tonight?

    I think stocks will shudder again tomorrow, especially if 2/10 truly inverts another 5 or so bps.

  3. Don H Says:

    /GC Bullish above 1506 to a 1545~46 high retest. IF 1506 fails to hold bid before trading higher, then anticipate a deeper pullback.
    /ES trapped in ~200 pt range. IF Sellers hold mkt below 2897, then anticipate another down rotation. Potential target below 2790. A bid above 2897 may trigger squeeze higher.
    My .02

  4. asherz Says:

    Yra- Do you really believe that an emergency 50 basis FF cut or 100 basis cut will affect the economy? How much did trillions in QE impact global economies? They certainly affected asset inflation. But I think we are unfortunately at the stage of pushing on a string, a phenomenon we saw in the 1930s. Interest rates are not a factor today in stimulating capex and business investment. The investment is into stock buybacks and have produced the mother of all credit bubbles and insane debt levels.
    Negative interest rates? Step back, look at the forest. Insanity. Fed Funds? Inversions inshmersions. We are in bond and equity markets that have lost all semblance rationality. The inmates are in charge. All it needs is a black swan and the referee blows the. Whistle.

    • yraharris Says:

      Asherz—-agree totally but my rationale is that it will get the FED out of the range of fire and hopefully begin some steepening begin to set in which is necessary but cannot get going.The unemployment picture is positive because firms hire workers because they are easier to get rid of then CAPEX—we are in agreement

      • asherz Says:

        The US economy has been doing better than most of the world because of the Trump tax cuts, deregulation, and energy policy. But these positive steps have a shelf life that won’t exceed 3 years or so. All positive but because of many other factors will not be sustained. In a macro way it reminds me of the “cash for clunkers” that gave the auto industry a shot of adrenalin but the car ran out of gas.
        And remember, all this is being financed by debt and trillion dollar deficits.. The recent monthly treasury auctions have not been robust in the bid to cover, and supply will overwhelm the buyers. Of course the Buyer of Last Resort will be there to backstop. What does this mean for the reserve currency? Not good news.
        I recently quoted Winston Churchill saying that Nixon’s severing the mooring of the paper currency from gold in 1971 was the end of the beginning. Actually it was the beginning of the end with Central Bankers donning their sailor uniforms as inebriation has taken hold in their port of call.

  5. Trader1 Says:


    You mentioned in past that Draghi might buy bank stocks at Sept ECB meeting.

    Now that EU banks are imploding and German economy is shrinking is there any chance he might be able to pull off a Euro Bond?? Or will that be left for Lagarde??

    • yraharris Says:

      Trader1 –the Eurobond will be left for Lagarde–but look for bank and financial equities to be on the buy list of QE

  6. Bosko Says:


    With such a large amount of global debt, which can never be paid off, the entire monetary system must be modified, adjusted or reset, some how? Having a “lender of last resort” that is allowed to create money (debt) out of thin air and not be accountable for their actions is bound to fail. The era of central bank control is coming to an end, and gold by default will become the “lender of last resort.” The trick is to educate the private gold dealers and gold hoarders to become their own administrators of gold financing. Use their gold on hand to create localized lending facilities. There’s a breaking point to everything, the question is when? Judy Shelton presents a good idea in her book “Money Meltdown.”


  7. Trader1 Says:


    Trump vs China Trade Deal:

    Why doesnt Trump try to refinance and extend maturity on USA debt China holds as part of Trade Deal?? – That could go a long way in the $500 Billion deficit Trump wants to narrow….in a different way….

    • yraharris Says:

      Trader–many are scratching their heads and wonder what it is that Treasury is thinking about and what say TBAC?—It would do a great deal to change the curve

Leave a Reply

%d bloggers like this: