Notes From Underground: Extra! Extra! Read All About It

On Wednesday, FEDERAL RESERVE Chairman Jerome Powell emphasized, yet again, that he and the FOMC believe UNEMPLOYMENT in real terms using its broad measure is about 10%. The recent release of labor statistics revealed a 6.3% unemployment rate but Powell stressed in his Q&A at Economic Club of New York that “the statistic doesn’t capture the full extent of labor market slack.” Bloomberg’s Craig Torres finally gave credence to the idea that Jerome Powell is focused on ending the present disparity between minority and white employment as Powell used FED data to clarify the black unemployment rate was 9.2% versus 5.7%.

It seems that analysts still perceive inflation as the greater problem for the FED as commodity prices push higher and the upcoming fiscal stimulus program will put even more pressure housing prices and everyday staples. GET USED TO THE IDEA THAT THE FED WILL BE ON HOLD AS CHAIR POWELL reiterated: “It could take ‘MANY YEARS’ to overcome scars from long-term unemployment, and even with the jobless rate at 3.5% in February, signs of inflation were scarce.”

The importance for NOTES FROM UNDERGROUND is that leaves the use of YIELD CURVE CONTROL as the next tool to be utilized by the FED so as to prevent the rise in the long-end of the Treasury curve.

Switching from asset purchases on the short-end will be the strongest signal that the FED is serious in leveling the injustices from past policy. At the post-FOMC press conference last month, Powell was ADAMANT that the traditional FED response to a steepening curve (my words) sustained the CLASSIC BUSINESS CYCLE. (Recent statements from some WALL STREET analysts maintain a steepening curve always precedes recession.) Why? Because the FED would typically raise overnight rates when the curve steepened as it perceived itself as being behind the curve, allowing the economy to overheat sending prices higher and higher.

To slow the growth, short rates would be raised, ending the steepening but always resulting in rising unemployment. Powell is promising not to go that route as he is more concerned about inequality in employment outcomes due to COVID. If the market continues to push long rates higher the only response to preventing  negative economic outcomes from higher long rates while locked at the ZERO BOUND is YCC. If this analysis is correct and results in YCC it will signal the next leg down in the U.S. DOLLAR because of its critical use as the world’s reserve currency.

The GOLD will also end its lethargy and resume its role as the world’s most important store of VALUE. When will this occur? I don’t know but I am just putting it out there so when it does occur, NOTES READERS AND FOLLOWERS ARE PREPARED. Also, I advise getting your technicals in place so you will be ahead in understanding support and resistance levels and better able to set risk parameters.

***There’s a brilliance about the selection of Mario Draghi as Italian Prime Minister. Since the announcement, European sovereign debt levels have contracted as Italian 10-year BTPs have dropped below 50 BASIS POINTS. The spread between German/Italian 10-year debt is at multi-year lows. Is it because Draghi is perceived to be the one to solve all of Italy’s debt and deficit problems?

I think not. It is a reflection that DRAGHI knows where all of the skeletons are in the closets of the ECB and Brussels that were utilized to crush Greece and cause Spain, Ireland Portugal and others to come to heel during the PIIGS crisis the first half of the 2010s. There were many questionable actions used by the ECB in Draghi’s role as ECB President in his efforts to “DO WHATEVER IT TAKES TO PRESERVE THE EURO.” NO TABOOS WAS THE MANTRA.

If Draghi is prime minister it will be difficult to say no to WHATEVER ITALY WANTS AS FAR AS FISCAL STIMULUS. The German NEIN and FRENCH HARDBALL negotiating with the ROME BUREAUCRACY has been halted. The compression in Italian spreads across the bond continuum tells us this is the outcome. Bravo, Italy.A hand well played. The tables have been turned. Is Mario a good European or a good Italian? Watch the European sovereign debt market for clues.

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13 Responses to “Notes From Underground: Extra! Extra! Read All About It”

  1. Pierre Says:

    When Dr. Yellen was asked about our National debt crises, at her confirmation hearing, the response was:
    “There has been a shift in economic thinking quantifying the costs of rising debt.This shift in the projected link between debt and interest rates is driven by a complex and changing set of circumstances, including widely available capital for lending, enduring faith in the credit of the United States government, monetary decisions by the Federal Reserve, and the relative appeal of non-interest bearing assets”
    Relative appeal of “non-interest bearing assets”, let that sink in for a minute.
    I’ve also had a “shift” in economic thinking by reading and listening to Notes From Underground.
    Watching out for YCC, resistance levels on XAUUSD and currencies with positive REAL yields.

  2. Philippa Dunne Says:


  3. Financial Repression Authority Says:

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

  4. The Bigman Says:

    Dear Janet,

    the 4 pillars of the shift in your thinking:
    1. widely available capital for lending- not so much if you are a small business person and not a hedge fund
    2. enduring faith in the credit of the United States Government- you mean that that tall, bearded guy in the funny suit with a lamp shade on his head and a drink in each hand?
    3. monetary decisions by the Federal Reserve- C’mon man you can’t say that with a straight face you dog faced pony soldier
    4. the relative appeal of non interest bearing assets- must mean bitcoin or gold certainly not Treasuries and relative to what? a sharp stick in the eye?

    I am really having a hard time getting my head around these statements- very disturbed WTF is she talking about

    Yra- great call on the platinum As far as Draghi goes, let’s see how he does without his printing press


    • Yra Says:

      Bigman–thanks for the Platinum shout out and all of your comments over the years.I struggle to follow the dialogue put forth by the key policy makers but lets see what Powell/Yellen come out with at the G7 this weekend

  5. BT Says:

    Yra- great notes as always.

    Have any of you noticed that the muni aaa to UST 10yr hit historic lows of now under 0.6? This means that no matter the tax bracket now, treasuries are a better deal. This is less than a year after the ratio hit historic highs of 3 in March 2020.

    Given that it seems like with current gov bailouts coming for every city/state don’t see muni yields jumping. This would imply that treasury rates will come down and we will get reversion to the mean with the muni: treasury ratio settling back at normal range of 0.8. This would imply that 10yr treasuries will settle back in the 0.8’s at current muni yields.

    • Yra Says:

      BT–thanks for the note.The muni market has grown to love a Biden administration for they view that help is on the way ,unlike a Trump admin desire to punish the Blue States and municipalities.The question remains for me and I know Louis Gave—where will the FED become uncomfortable with a rise in rates and will a YCC be prompted by Yellen just as in 1946 with the Treasury hell bent on Financial Repression of the rentiers in an effort to pay down war debt

      • BT Says:

        Thanks for the reply Yra. I guess where the 2+2=5 for me is why 10+ yr treasuries yields seem to be so out of sync with other US bonds like HY/junk/munis/short end treasuries. If the yields of all these were rising at least make sense.

      • Yra Says:

        BT–the market is pushing the FED to openly commit to YCC–what will the level be to force them to commit?Don’t know but this is a very serious issue and Yellen’s new position makes life ever tougher for Powell for Yellen has far greater stature in international circles and her prestige can push Powell to a 1946 type accommodation over the need to keep bond yields very low–YCC or operation Twist –you do the math

  6. Arthur Says:

    Enough said…

    Tweet from European Central Bank@ecb
    Roses are red
    Violets are blue
    We’ll keep financing conditions favourable
    ‘Til the crisis is through

    #ECBmyvalentine #ValentinesDay

    • Yra Says:

      Arthur–this is causing an uproar in some circles as the responses to the ECB are soliciting some highly critical poems .It is difficult to believe that GOLD stays so calm but as the US thirty year is climbing higher in yield the lever to move some asset classes in the hands of algos seeking that correlation—in answering BT it calls too question when YCC will be utilized

      • TraderB Says:

        It was a bit puzzling to me how platinum woefully underperformed both Gold & Equities this summer after the Fed gave everyone the green light to sell all risk premium down to zero. The (historically tight) spread between gold and platinum widened to over $1,050.

        Now we have Granny Warbucks telling Congress to “Go Big” and Platinum is going linear while gold has been quiet.
        I haven’t looked at a COT report, but is this rally in Platinum a major short covering? It kind of feels like a forced buying in a relatively illiquid market. The spread is now less than $500/oz.

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