Notes From Underground: The Sun Will Come Out Tomorrow

Say goodbye to Daddy Warbucks Say hello to Uncle Joe.

On Monday we got a preview of the Biden Administration as Treasury Secretary nominee Janet Yellen appeared before the Senate Finance Committee. It was sad that her testimony was released over the weekend. There were the stock answers to the issue of the U.S. dollar, which falls under the auspices of the Treasury Department. Yellen proclaimed that the markets would set the value of the DOLLAR and that it would not be the policy of the Biden Administration to manipulate the currency to attain some illusionary trade advantage.

In my opinion it would take a rapid decline in the dollar in order to sustain a genuine advantage for the U.S. economy. My question to Yellen and FED Chairman Jerome Powell is this: If you don’t allow the market to help set interest rates why would  you deem it okay for the market to set currency values and where does fixing interest rates negatively impact a country’s currency value?

Don’t artificially low rates in a time of rising inflation ultimately result in a currency depreciation? In the Gavekal year-end piece on the “10 Important Changes of the Past Year,” it said, “one day, central banks will decide that they need to support their currencies instead of supporting their bond markets. In this scenario, bond markets will implode.”

What that means is that in the wake of massive global central bank intervention, government bonds all across the Western world have now become “return-free” risks. So Ms. Yellen, where does the DOLLAR fit?

Especially since last week President-elect Biden spoke about his vision of “No Time To Waste” as he unveiled a $1.9 trillion stimulus plan. In describing the economic impact Biden followed Fed Chair Powell: “During this pandemic, millions of Americans, through no fault of their own, have lost the dignity and respect that comes with a job and a paycheck. There is real pain overwhelming the real economy.”

The president-elect is correct but if he’s in sync with Powell the question arises: How flexible will the FED be in securing jobs for the most vulnerable and hardest hit by the forced shutdown? Many pundits maintain that rising inflation will force the central bank to move rates higher sooner rather than later. If so, then they believe that Powell is being disingenuous with his concern about regaining high wages and jobs for those minorities hardest hit by Covid. Yellen is no Mnuchin. She is a labor economist with real banking experience. POWELL will be forced by his own musings on social justice to remain lower for longer.

The recent steepening of the yield curve–duration moving yield higher out on the curve–by MARKET FORCES will result in real concerns by the Treasury and the FED. HOW HIGH DO 10s and 30s have to rise before the FED acts? I don’t know but we will be watching. Again, in a Q& A from Princeton last week, Powell stated very clearly: “People on the margins need to be brought in for a consideration of maximum employment.” The question raised in NOTES last April and May remains relevant although it has been adjusted: If unemployment is 6%, while inflation rises to 4% will the FED raise rates? In our estimation this the major concern going forward. A new regime will wonder if it in BONDAGE TO THE bond market.

***Tomorrow morning the Bank of Canada announces its interest rate decision at 10:00 a.m. EST. I believe there will be no change as rates stay at 25 basis points and QE remains at current levels. Commodity prices are on the boil as the BLOOMBERG Commodity Index has risen just above the 200-week moving average. Plus, the BOC will be reticent to cut rates in an effort to put downward pressure on its currency, and testing the incoming U.S. Treasury Secretary.

The LOONIE has been strengthening over the last two months, albeit it’s been a slow grind higher. Rising commodity prices along with yields on its 10-year bonds at mere 30 basis points below the U.S. are attractive for global investors. Check support levels on the CANADIAN DOLLAR for a test after the BOC announcement. Higher commodity prices have traditionally been a boost to Canada, but do you work and set your risk parameters.

 

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15 Responses to “Notes From Underground: The Sun Will Come Out Tomorrow”

  1. Yra Says:

    Note from Yra—the blog title has nothing to do with politics–nothing—it merely claims that regardless of all the chatter the sun will come up tomorrow just as Annie meant it—directed at all those predicting the end of the world so before the noise erupts –take it as Annie meant it and keep the politics to yourself

  2. hopgrower Says:

    Another interesting Yellen comment IMO

    “I think many cryptocurrencies are used, at least in transactions sense, mainly for illicit financing and I think we really need to examine ways in which we can curtail their use and make sure that anti-money laundering doesn’t occur through those channels,”

    • Yra Says:

      Hopgrower–yes you are correct and good catch–I read and heard this too and it was exactly what La Garde said late last week—remember that government’s HATE competition and currency is the bastion of the rights and duties of a Sovereign—but they forget the OBLIGATION of a fiduciary

  3. Bosko Says:

    Yra, the Trillions in debt around the world is very shocking and many in the gold market use this as a barometer to justify $50,000 + gold. But I keep thinking of a story about how $1 paid off $5 of debt in a chain of debt.
    A hotel clerk borrows $1 from a guest, clerk pays his $1 debt to the piano player, piano player pays his debt to the bar tender, bar tender pays his debt to maid, and so on until the clerk returns the $1 to the guest and all debts are paid.
    So if this scenario is applied to global debt between countries, then it’s not as scary as it seems, right?
    I guess the trick is to make sure everyone honors their debt?

    • TraderB Says:

      $1.9 Trillion… let’s make that two please. Let’s go with $3.8T and get this party started right.

      Obviously someone is going to need to buy all those treasuries. Hmmmm.

      Janet + Jerome = Risk On

    • The Bigman Says:

      FWIW from the bleachers: I see two things of concern about this story:
      1. The dollar used and now held by the guest is itself an IOU- the Federal Reserve owes the guest the dollar but allows the guest to transfer that debt to another as legal tender. So the counter party in all these transactions is the Federal Reserve which is increasing the supply of said notes at an unprecedented rate.
      2. Let’s say the guest is from Mexico and made the first loan in March 2020 when $1= 25 pesos He is back in Mexico now and he remembers he has the dollar. He takes it to a bank and now receives 20 pesos in exchange for his dollar. This loan to the Fed has resulted in him losing 20% of his buying power.

      IMO The story only works if the dollar(Fed notes) stay in the hotel and the price of a room doesn’t increase while you are waiting to get your dollar back.

      • Yra Says:

        Bigman–seems you are well versed in the assumptions underlying the Phillips Curve

      • Pierre Says:

        Exactly, the guest having real money in the first place, would be able to extinguish all debt. But, since our guest only has an IOU we are in a continuous cycle of more and more IOU’s.

  4. Financial Repression Authority Says:

    […] LINK HERE to the Blog Post […]

  5. Arthur Says:

    Obama, Trump and Biden: Consistency in Foreign Policy
    by George Friedman – January 18, 2021

    Click to access obama-trump-and-biden-consistency-in-foreign-policy-geopoliticalfutures-com.pdf

    • Yra Says:

      Arthur–thanks for the post but I am not a big fan of George Friedman who I believe is steeped in the traditions of the U.S. foreign policy establishment since the times of George Kenan—I don’t see the world through containment for the Vietnam war colored my world —-I ask this question—if Turkey and Russia go to war will the U.S. come to the aid of Turkey under article V of Nato and its collective action clause—if the answer is no then the whole edifice of NATO and the post world war policy are called into question—but it is a good post as Freidman is highly respected and needs to be read

      • Arthur Says:

        I agree with you!!

        By the way, former Treasury Secretary Lawrence Summers told the Economic Club of New York yesterday, “the government, if it wanted to, could lock in low interest rates for the foreseeable future with 30-year debt.”

    • bob zimmerman Says:

      If the Fed is looking for inflation why would they want to go to YCC? Let it run to achieve your goal.

      • Yra Says:

        Robert–the times are a changing but if long duration yields rise pushed by MARKET FORCES they will raise borrowing costs for many state and local governments and potentially curtail the housing boom as well as elevating US Treasury borrowing costs crowding out some discretionary spending programs creating political tensions—inflation can rise but if 30 year yield rise to historic real yield levels because of market forces the FED will have a problem.The 30 year is tied in through algos to the price of many assets so if yields rise to –you pick the level—inflation will be difficult to attain

  6. Yra Says:

    Robert–the times are a changing but if long duration yields rise pushed by MARKET FORCES they will raise borrowing costs for many state and local governments and potentially curtail the housing boom as well as elevating US Treasury borrowing costs crowding out some discretionary spending programs creating political tensions—inflation can rise but if 30 year yield rise to historic real yield levels because of market forces the FED will have a problem.The 30 year is tied in through algos to the price of many assets so if yields rise to –you pick the level—inflation will be difficult to attain

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