Notes From Underground: Dudley Do Right Gives the Markets Snidely Whiplash

Ok, I couldn’t resist the obvious joke. It seems that former New York Fed President Bill Dudley penned an op-ed for Bloomberg in which he elevated the Fed into an actor in the U.S. political process. The message that Dudley initially tried to convey is one that NOTES has actually expressed concerns: That President Trump has trapped Chair Powell by using TARIFFS as a mechanism to bludgeon the FOMC into lowering rates to counter any of the negative impact from trade frictions unleashed on the global economy. Dudley admonished Powell to play the role of Bartleby the Scrivner in Melville’s short story, that when it comes to cutting rates in response to financial implications of the China/U.S. trade war, simply say “I choose not to.”

Then Dudley jumped into the abyss and made it a political ploy in an effort to undermine President Trump’s 2020 reelection. Unfortunately, for Powell and Dudley the Trump’s FED TRAP was set when Powell PIVOTED in January when U.S. equities allegedly felt the pressure of the central bank’s FED‘s rate increases and balance sheet unwind. The rate cut on July 31 against a backdrop of strong data ensured that the tariff trap was working as intended. Now, the higher the probability of increased tariffs, the more the FED would lean toward cutting rates to minimize UNCERTAINTIES AND RISK. Does President Trump prefer lower interest rates or higher tariffs? Before, the president had moved to challenge China by citing it as a currency manipulator, thereby punting the issue to the IMF for review.

The PROBLEM WITH DUDLEY — besides enormous hubris — IS THAT HE FAILS TO ACKNOWLEDGE THAT THE TRUMP TRAP WILL NOW BE EXTENDED WITH A CURRENCY WAR. The idea of currency intervention is the purview of the U.S. Treasury and not the FED so the president doesn’t need the cooperation of the FOMC. The point is that the president will trap Powell as he directs the Treasury to sell dollars while Trump JAWBONES the U.S. currency lower.

The president can talk down the DOLLAR in a way that would actually mirror the FORWARD GUIDANCE in the tool kits of the world’s central banks. The President can promise to keep pressure on the DOLLAR for a long period of time. This would undermine Dudley’s thesis as a full blown currency war would potentially do far more to disrupt global financial markets.

Dudley’s snide approach about potentially impacting the election may not play out as he pretends to predict. What would I perceive to be a key to seeing the onset of a currency war? The canary in the coal mine for me would be the resignation of Treasury Secretary Steven Mnuchin for he has been the mainstay in restraining the president. On Wednesday, Bloomberg published a story titled, “Mnuchin Says U.S. Doesn’t Intend to Intervene on Dollar For Now.” The article is based on an interview with Mnuchin, who said, “No intention of intervention at this time. Situations could change in the future but right now we are not contemplating an intervention.”

Let me remind readers that on May 25, 1998, Robert Rubin, a far more powerful Treasury Secretary, proclaimed the support for a strong dollar policy. Then on June 17 of that year, the Treasury acted to weaken the dollar against the YEN in a direct intervention. Again, if Mnuchin tenders his resignation it won’t be a time to be short currency volatility or long U.S. dollars. There are many unhedged long DOLLAR positions, especially from foreign entities who have purchased a slew of U.S. Treasuries in the ongoing search for yield.

***Two quick points: I am posting a podcast I recorded on Tuesday with the Financial Repression Authority and Richard Bonugli. It was a pleasure to discuss global macro with Guy Hasselman. I must say it is worth a listen.

Second, this weekend we get regional elections in German Regions of Saxony and Brandenburg. The key to watch is how well the Alternative for Deutschland performs. In the previous elections in Saxony the AfD received 9.7% and is projected to receive 24%. In Brandenburg, the previous poll had them at 12.2% and projected to receive 22%. Anything greater would be a disaster for Chancellor Merkel.

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13 Responses to “Notes From Underground: Dudley Do Right Gives the Markets Snidely Whiplash”

  1. Rony Schlapfer Says:

    Yra it feels kind of so interesting but also so scary

    • yraharris Says:

      Rony—it is interesting but I believe you are correct as it seems likely to spin out of control and the central banks have made such big bets

  2. Don H Says:

    Since last post: /ES Obviously surpassed the 2902 target & continues higher as I post this at 2934.25. Bullish above 2916, on any pullback from here.
    /ZB Tested lower today & 164’20 held but is under pressure again this eve. Bullish above/ anticipate deeper pullback IF it fails to hold bid.
    /GC Also tested lower but still above 1526 to hold this range. Bullish above/ anticipate deeper pullback on a failure.
    My .02
    fwiw…Even with all the doom & gloom, we are only 40 handles shy of a green Aug. close 🙂
    Enjoy the time away!

  3. Richard Papp Says:

    Perhaps it may be helpful to look @ the Big Picture from a Dow Theory point of view. Since the last joint highs of the Industrial & Transport Av., the latter has traded in a tighter & tighter range. That is, declining tops and raising bottoms. If the predictive directional value of Dow Theory comes true, than the last 11 months have been all distribution.
    Which reminds me of a past Yra post when he quoted the great 20 century philosophers Chad and Jeremy and “Yesterday’s Gone”.

    Have a great weekend

    • yraharris Says:

      Richard—a broadening top heading into the October period—what could possibly be wrong with that?

  4. Harry Says:

    It’s unfortunate that the Fed is being politicized. One pillar of the American system is checks and balance. If everybody subjugates to one man, might as well invite the Queen of England back. Mark Carney can come and straighten up the Fed.

    Like to hear fellow readers what the Fed should and could do in the currently charged political environment.

    Your views?

    • yraharris Says:

      Harry—the Powell pivot undid what Powell was striving to do and that is the trap he walked into—-that is just a problem we cannot shake.The pivot was a reaction function to politics which emboldened Trump even more but he saw he was getting his way—the July cut solidified his sense of power

    • Don H Says:

      Since last eves post:
      /ZB took out 164’20, so, IF Sellers cap today’s bounce below 166’00, then 163″31 target below; A break/bid back above 166 before trading down wld be Bullish.
      /GC Ticked below 1526 this afternoon, so, IF Sellers hold any bounce below 1550, then 1522 initial target (1518 secondary). A bid back above 1550 before continuing lower wld be Bullish.
      My .02
      Be safe & enjoy the time away!

      • Don H Says:

        Both /ZB & /GC have broken 166’00 & 1550 respectively this a.m. for squeeze continuation.
        /ES Below 2927 targets 2888; A bid above 2927 before that target trades, then anticipate squeeze higher.
        Updated .02

  5. Trader1 Says:


    For years Larry Kudlow has stated “king dollar” – How does Kudlow play into a Mnuchin ‘resignation’ ???

    • yraharris Says:

      Trader—Kudlow seems to have sold his soul to attain position—what he believed theoretically he works for a firm with a different plan of action

  6. kevinwaspi Says:

    I second the motion on King Dollar Kudlow, and (surprise, surprise) no one on CNBC wants to ask him about that, much less play a tape of him voicing those words on numerous past commentaries. On Wednesday, Mike asked “what are these academics thinking?” I won’t repeat my answer but remind us all, these people do not go to the grocery store. Their people do. “When was the last time, sir, that you went grocery shopping?” one audience member asked. Bill Dudley’s gaff last week was far from his first. and even Mr. Powell gets sucked into the vortex.
    Have a restful three day weekend.

  7. Chicken Says:

    Price stability, indeed!

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