Notes From Underground: Was It the Fool On the Hill?

On Tuesday, Federal Reserve Chairman Jerome Powell testified before the Senate Finance Committee in the semi-annual Humphrey-Hawkins Testimony and Report to Congress, in which the Fed has to answer as to how the U.S. economy is performing in relation to its dual mandate. Senator Sherrod Brown, the chair of the finance committee, is very knowledgeable and in similar fashion provided strong leadership but unfortunately he cannot censor stupid questions as politicians use the microphone for political posturing. There were many types of “when did you stop beating your wife” questions as if the Senators wished to trap Powell instead of an honest assessment.

Powell is not going to answer questions about FISCAL STIMULUS for that is Congress’s bailiwick and if the FED wishes to remain politically independent it does not go where angels fear to tread. Senator Mark Warner asked about what tools the central bank will use to counter any inflation threat. Powell danced around the question and merely left Senator Warner with this: “Trust us. We know how to control inflation.” In other words, “Basically, we are not expecting inflation therefore no need to discuss particular tools.”

Senator Richard Shelby also pushed on the inflation issue and Powell retorted that disinflationary forces have prevailed for the last 25 years, so there’s very little concern over the recent price rises in commodities because they reflect a coming spurt in pent-up demand and the monetary authorities see this as TRANSITORY.

Powell asserted that the FED has ample time “as inflation dynamics do not change on a dime.”

To the Fed chairman, I say this: YOU ARE WRONG FOR THE GLOBAL DYNAMICS ARE CHANGING. All the world’s central banks failed to achieve the coveted 2% inflation target because the Chinese were busy EXPORTING DEFLATION AROUND THE GLOBE. On January 1, 1994, the Chinese DEPRECIATED the YUAN by 50%, to 8.7 from 5.8 to the U.S. DOLLAR. The power of the Chinese labor force was unleashed to export to the world. Foriegn money rushed in to China and along with the ASIAN TIGER growth excess capacity sent global prices into a tailspin.

This is what the FED and its beloved PHILLIPS CURVE failed to comprehend for the model was based upon domestic data. Massive production capacity ensured low prices even as U.S. workers struggled under the low wages that resulted from the Asian miracle. I posit this: The Chinese may be pivoting again as they move from an export-oriented economic model to a more domestic based model with domestic consumption being the keystone. If this proves correct, the YUAN will rally as the stronger currency enhances Chinese domestic purchasing power.

If this indeed is happening the YUAN becomes critical. The dramatic rise in RAW MATERIAL PRICES is not because of a strong global economy but because of some economic actor of major influence stockpiling massive amounts of everything needed for productive inputs. (For more on this, see the South China Morning Post’s story titled, “China’s New Five-Year Rural Revitalization Plan Emphasizes Food Security.”)

The FED is making another big bet with a flawed model and believing that the disinflationary forces are still at work, but if the YUAN keeps rallying and prices keep rising the American workers are going to suffer the burden of higher prices. Powell was asked if he was concerned about the recent rise in housing prices, which are not an input of the Personal Consumption Expenditures and the FED is not concerned. But they need to be as Chris Whalen and Peter Boockvar have warned that continued FED purchases of mortgage-backed securities are keeping mortgage rates too low relative to growing demand, which is pricing many middle income earners out of the market.


***On Tuesday night the Reserve Bank of New Zealand will announce its interest rate decision. THERE WILL BE NO CHANGE BECAUSE THE KIWI CURRENCY IS TRADING AT MULTI-YEAR HIGHS versus the U.S. DOLLAR and other key global currencies. The Kiwi economy is stronger than forecast but the currency strength will be termed a potential headwind for growth.

So much for currency intervention being opposed by the G-20 but listen read the text closely for any clues about accelerating Chinese economic growth. The KIWI are on the margins of the global economy but that is where prices are made. The New Zealand 2/10 yield curve has recently steepened in similar fashion to the U.S. and Australia so listen to any hint of yield curve control, setting the table for the FED and other central banks.

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16 Responses to “Notes From Underground: Was It the Fool On the Hill?”

  1. RADM.Yamaguchi Says:

    Yra, Have you noticed T-bill yields? Looks to me they are heading much lower/negative. What are people looking for inflation going to make of that?

    It seems to me if you have negative tbill rates things measured in that currency go into backwardation? Got Gold? Got Silver?

    • Yra Says:

      RADM—-repo rates went negative yesterday afternoon–the FED QE being heavily centered on the short end is causing competition for those in need of short term high quality liquid assets —competition driving short rates lower into negative territory—nothing more

      • RADM.Yamaguchi Says:

        1 mo T-bills trading negative yield today. 3 mo T-bills likely to join them as early as tomorrow. Competition? More likely terminal instability.

  2. Michael Temple Says:


    Take a look at this chart.

    A picture is worth a thousand words.

    What, about this chart, screams that commodity price inflation is transitory and NOT the start of something that could last for YEARS, not months.


    • David Richards Says:

      Yes, as a chart of a ratio, reversion to the mean requires that commodities priced in USD relatively rise, or US equities relatively fall (or both). Guess which one US policymakers will do everything they can to NOT allow in the financialized US economy.

      And speaking of “YEARS”, that’s how long commodities and currencies tend to trend, historically. The commodity bull and dollar bear markets are quite possibly just in the early stages of a new cyclical trend (tho a key technical level remains).

  3. Mark Voller Says:

    Recommended read in today’s FT – Richard Bernstein : Fed needs to ignore ‘taper tantrums’ and let longer rates rise. Do you agree ?

    • Yra Says:

      Mark–read it and it has been a theme of this blog for a long time and Santelli /Harris had many on air discussions about the need for markets to regain their status as signaling mechanisms.The Bernanke taper tantrum was a grave error as the FED and academics cowered in the face of market losses—most recently the Powell Pivot gave strength to the wall street crowd to keep stealing the lunch money from by threatening to cause economic pain through market corrections—-the FED got bullied again.Thanks for posting the Richard Bernstein piece as he is very cogent in making the point

  4. Financial Repression Authority Says:

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

  5. David Richards Says:

    Yra – another wonderful piece containing numerous astute observations. IDK how you write these so quickly.

    The Chinese might be attempting to copy what the US has been during its greatness, by creating the world’s new globally-coveted consumer class. And it appears to be working as China has ascended to become the #1 export market and trading partner for most countries in the world today. This is already paying geopolitical dividends, to wit this year there’s the new, first-ever EU-China trade & investment deal despite US objections, mere months after the RCEP trade pact covering all of East Asia except Taiwan.

    Meanwhile, on the other side of the world, dollar devaluation is a core cause of rising US inflation, and because US policymakers are evidently unconcerned about either (or apparently even welcome it), we should expect much more of the same to come. So sad because history for millennia shows that nothing rips apart society as much as high inflation. That’s understood in the collective psyche of Germans, Asians and no doubt CCP policymakers due to the history of the past century or two, but not of concern to US policymakers.

    Like generals who refight the last war, US policymakers, determined to not relive the 1930s in which few could get dollars with which to buy anything, are instead leading the US down the road in which few will be able to get anything to buy with their dollars.

    Powell apparently thinks that high inflation is more easily subdued and/or less of a societal threat than high unemployment. Asians (and Germans) believe the opposite. Policies are being formulated accordingly. On the basis of thousands of years of historical evidence, I think the Asians have it right. Let’s watch.

  6. Yra Says:

    Dave Richards—thank you for the wonderful compliment and you are a big part of this .Your comments from the Asian sphere of influence are always appreciated and full of great insight—-great to have boots on the ground.The work I do is ten to twelve hours of reading and analyzing built on a foundationof great teachers and mentors going back to the mid-seventies in grad school at University of Wisconsin and the of course those who took the time to teach me the nuances of the global financial system—-Jim Sinclair,Lenny Feldman,Paul Kimball,Leo Melamed,Vince Schreiber,Mike Sturch,Charlie R. who taught me the nuances of trading–because if you are right at the wrong time you are wrong.This is what makes this work so exhilirating and then over the last eleven years people like you and so many others who take the time for dialectic and discourse and not validation.Go have a drink as the road ahead is going to be long and winding—-Charlie Munger may have Lee Kwan Yew but NOTES FROM UNDERGROUND have Dave Richards and Andrew Perry

  7. David Richards Says:

    Haha, nope, all I bring to the party is sixty years of errors – and an occasional good call made for the wrong reason.

  8. kevinwaspi Says:

    David Richards—
    Me thinks you are too self-depreciating. In all honesty, your perspectives from Asia have helped me see around another corner, and I appreciate your sharing those insights here on NOTES with Yra and all regular contributors/readers.

    • Yra Says:

      Amen brother Waspi is has also provided great insight over all these years—The Professor indeed—let’s go to the Rose Bowl and have some libations and support Blue Grass Musician and bar owner Charlie Harris—-the Rose Bowl in Urbana Illinois

    • David Richards Says:

      Thanks guys. Greatly appreciated. I like to contribute but I get more than I give. I’m no expert on east Asia despite having lived here many years (as a western “foreigner”), which does impact one’s perspective.

      But as with many things, the more you experience and learn, the more you realize how little you know. Especially about China where I’ve only taken trips, unless you include HK where I worked in the 1990s.

      Perhaps the best thing I’ve read about China is by Ray Dalio, who worked and lived in China before, and claims to have many good contacts. It’s a fairly long read but quite worthwhile, packed with words of wisdom and insightful perspectives, including even a monetary history.

  9. The Bigman Says:

    Time to trade VIRT again?

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