Notes From Underground: How To Deal With Transitory Data

First, thank you to all  who filled in for me as I spent nine full days packing up my life in Chicago. Raising four children and being the repository for many of my loved ones “stuff” resulted in a drowning in memories as well as material possessions that raised questions about what the HELL was that for and why? Our last post was March 1 but I am proud to point out that there were about 74 comments on that entry, all but mine being extremely valuable. Thank you to all for the way you raised the bar for discourse even higher.

On Thursday, I had the pleasure sitting with Richard Bonugli and Daniel Lacalle, one of the most respected macro analysts from Europe. This podcast sums up the vast amount of work I have done while traveling and ruminating after days of arduous labor.

Click here to listen to the podcast.

On Wednesday we heard from Jerome Powell and the FOMC and Powell was busy to avoiding the hard answers so as to not roil the market. Readers of NOTES know I am not a fan of CNBC’s Steve Liesman, but I will give him creditfor asking the most poignant question about when/where the FED will become concerned about the level of yields on the longer-end of the YIELD CURVE. Liesman asked about the use of the tool of OPERATION TWIST. Peter Boockvar, a highly respected analyst, pointed out that the Liesman question was critical but Powell read a prepared statement in response and we both that the chairman ducked and dodged the question. Liesman’s failure to use the phrase YIELD CURVE CONTROL makes me wonder if the FED HAS MADE THE PHRASE VERBOTEN.

After the DOLLAR SOLD OFF FOLLOWING POWELL’S DOVISH PERFORMANCE — REMEMBER, HE MAINTAINED THE FED WILL KEEP SHORT RATES PINNED TO THE ZERO LOWER BOUND FOR THE NEXT 30 MONTHS — Thursday’s trade led to another ATTACK ON THE LONG END OF THE YIELD CURVE AS MARKETS ARE BATTLING THE MOST ASSET CLASS. If the TREASURY is going to issue copious amounts of debt and that is where the FED IS GOING TO DO 80% of its ASSET PURCHASES then market participants, from BUFFET and DALIO to  DRUCKENMULLER and GUNDLACH will attack the long end.

By remaining a slave to its current QE policy, the FED FAILS TO ACKNOWLEDGE IT IS IN A WAR. Powell’s failure to get ahead of the battle takes me back to the late 1960s/early 1970s as the news reports from VIETNAM were all about body counts but Saigon was under siege. Chairman Powell, you may be sanguine but the markets view this as war. Liesman tried to wrangle an answer, but the question remains: At what point does the YELLEN TREASURY/POWELL FED become uncomfortable with yields on the long end? It takes two to TWIST.

I will stress this: We have never been in a position where the LONG END OF THE CURVE DICTATES ASSET PRICES BECAUSE THE FED HAS STRESSED THAT RATES AT AT ZERO UNTIL ALL THE PEOPLE SUFFERING FROM THE COVID ECONOMY THROUGH NO FAULT OF THEIR OWN HAVE BEEN RETURNED TO THE JOB MARKET. Enjoy the podcast.

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20 Responses to “Notes From Underground: How To Deal With Transitory Data”

  1. Greg SLUTSKY Says:

    Finally gave up the cold? Welcome to sanity and a better quality of life

  2. Financial Repression Authority Says:

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

  3. David Richards Says:

    I just heard the Fed announced that the temporary change to the supplementary leverage ratio (SLR) will expire as scheduled on March 31, 2021, contrary to what I opined just yesterday here (previous post).

    Anyone else surprised that this wasn’t extended like Fed swaps were not long ago?

    • David Richards Says:

      … and predictably, the belly of the curve isn’t lovin it so far.

    • Yra Says:

      David–I think the FED has cowered in the face of SENATOR Warren and Brown although this appears to be a joint effort with OCC and FDIC so who caved politically but if that is correct it will hasten the need for YCC in an effort to prevent the second rapid rise in yields.The critical element is how high the market pushes –my sense is the market will try to attain some historical average of real yields on the ten year note

      • BT Says:

        Isn’t this a good thing that SLR will expire? Do we really want the banks spending their capital on dividends and stock buybacks?

        My take is this will make it very unlikely the market does anything other than chop for awhile as this will put pressure on bank stocks. Add oil weakness and which sectors are going to keep this going higher from here? My guess is Inflation expectations will come down as credit tightens, and the reality shows up in q2/3 when jobs don’t come back as expected and corp margins get hit from supply chain/higher costs that they cant pass on to the consumer. My hope is this recovery is real and we don’t have a double dip recession but reality has me expecting the worst.

      • Dan DeRose Jr Says:

        Yra,

        Glad to see you back. The SLR expiration was understandable after the Fed increased the repo facility at their meeting to $80B. The move was more or less unprompted as take up of the facility has been minimal but they are ‘foaming the runway’ as some have said for upcoming liquidity. If this is so, have they unleashed the long end to police asset markets? Isn’t this a good thing and in line with your recommendation to the BOJ over the years?

  4. kevinwaspi Says:

    All ye faithful, fear not, set up your own SPAC and join the fun!
    Federal Reserve Chairman Jerome Powell reiterated Friday that while the outlook for the economy has improved, the central bank plans to continue supporting the recovery “for as long as it takes.” (Whatever it takes???) “The recovery is far from complete, so at the…”
    Mr. Powell made the comments in an opinion article published by The Wall Street Journal.
    https://www.wsj.com/articles/feds-powell-economic-outlook-is-brightening-11616165518?tpl=centralbanking

  5. Arthur Says:

    Just a reminder. The next financial crisis may be coming soon
    https://www.ft.com/content/c95e5a72-8322-4cfc-b36a-69e8998aea01

  6. Pierre Says:

    Good to have you back Sensei.
    Two thumbs up on the podcast!

  7. The Bigman Says:

    In addition to the Fed’s new social justice mandate, there is also the new climate change mandate as delineated and skewered by John Cochrane in his March 18 Congressional testimony:

    https://johnhcochrane.blogspot.com/2021/03/testimony-on-financial-regulation-and.html

    or in Alfred E Powell’s(What me worry?) own words:

    “What we’re really working on is: how do we incorporate climate change risk into all that we do,” Powell said during an online panel Thursday hosted by the European Central Bank. “It has potential implications for monetary policy, for bank regulation, for financial stability, and I would say we’re in the very early stages of trying to work through what that means for our goals.”

    So the new dual mandate is social justice and climate change.

    This should end well

    FWIW TBM

  8. hopgrower Says:

    IMO why can’t the legislative branch make policy? It seems to me that every governmental agency/group makes policy except for elected ones. The elected ones spend there time running for cover trying not to get to pinned down on any issue. The financial monetary agency leaders should receive a mandate from congress and implement it. I may or may not agree with these mandates but, I will take that up at the ballot box for my legislator. Isn’t that how it is supposed to work?

  9. ShockedToFindGambling Says:

    Yra, congrats on moving.

    As I listen to CNBC basically all day,almost everyone has the same analysis…….the economy will recover strongly this year, backed by
    stimulus and FED, and the Stock Market will rally.

    Almost everyone is on the the same side of Das Boot. even though Market Cap to GDP is substantially higher than in 2000 (Dan Niles).

  10. Pierre Says:

    I’m surprised nobody has mentioned anything about Yra’s KSU call.
    Not sure where it’s going to go from here, but for now I’m very impressed.

  11. Jeffrey Carter Says:

    Congrats on leaving. It’s hard. We left in 2020. It is worth it though, especially with what is going to happen to Illinois taxpayers. Bring your sticks when you come to Vegas.

  12. ARTHUR Says:

    Just how anchored are America’s inflation expectations?
    https://www.economist.com/finance-and-economics/2021/03/24/just-how-anchored-are-americas-inflation-expectations

  13. Pierre Says:

    A review of last year’s, “dash for cash”.

    https://www.fsb.org/wp-content/uploads/P171120-2.pdf

  14. Arthur Says:

    Very interesting. Geopolitical calendar
    https://geopoliticalcalendar.com/

  15. Arthur Says:

    The Nixon Seminar. Transcript. Peter Thiel
    https://nixonseminar.com/2021/04/the-nixon-seminar-april-6-2021-transcript/

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