Notes From Underground: Plus ça Change, Plus C’est La Même Chose (An Ode to Jerome)

As promised, here is the podcast I recorded with Anthony Crudele. There is a great deal expressed in 52 minutes following the June 16 FOMC meeting. The fact that Chair Jerome Powell kept on keeping-on with full blown asset purchases leaves me in the camp of very little change regardless of the DOT PLOTS. As Powell said about the FED (and Wall Street economists), not a very good record of forecasting.

Click here to listen to the podcast.

It is an important point to make as I did in the interview with Anthony: Powell cherry-picked his transitory inflation indicators by specifically mentioning LUMBER and USED CAR PRICES. As Simon and Garfunkel sang 50 years ago, a man hears what they want to hear and disregards the rest. The FED has been, is and will be GUILTY of bias fitting in an effort to control the narrative they desire to foist upon the investing public.

On Monday the markets across many asset classes breathed a sigh of “hawkish” relief as equities, precious and industrial metals, energy and foodstuffs all found some support. Even the DOLLAR lost some of its recent strengths as markets try to determine if the FED has moved to a tighter monetary policy. Trade this environment with patience and enter markets at levels of your choosing and pain threshold. We’ll continue to monitor the Chinese yuan to see if the notion of China’s impact on inflation continues to have credibility.

On Tuesday Powell is set to testify before the Select Subcommittee on the Coronavirus Crisis in the House of Representatives. The prepared testimony has already been released and it pays homage to the expected transitory nature of recent inflationary pressures. Powell returned to the employment criterion nature of its mandate for more than last Wednesday’s press conference ,donning the cloak of Minister of Social Justice. As he wrote: “The economic downturn has not fallen equally on all Americans,and those least able to shoulder the burden have been the hardest hit.In particular,despite progress,joblessness continues to fall disproportionately on the lower-wage workers in the service sector and on African Americans and Hispanics.”

As a moral philosophy this is to be applauded. However, as the stance of the world’s most significant central banker with the fiduciary responsibility of the world’s reserve currency it is to be abhorred. We didn’t hear a PEEP about this last Wednesday as Powell was evidently cowed by Paul Tudor Jones. Enjoy the Crudele broadcast as we try to understand which master Powell desires to serve.

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20 Responses to “Notes From Underground: Plus ça Change, Plus C’est La Même Chose (An Ode to Jerome)”

  1. David Richards Says:

    Yra, you are wise beyond your young years again, lol, in this and your previous post. Not getting flustered or losing sight of the big picture during inevitable counter reactions.

    For anyone who listens, US policymakers have and are telling us what they’re gonna do. As if they have a choice, they do not. Tho they try to pretend to, in order to feign that they’re in control.

    Well theoretically maybe they do have a choice, it’s inflate or die. So it’s kinda a Hobson’s choice, I think.

    Recommended reading to all – Lords of Finance: The Bankers Who Broke the World. History repeats, or at least rhymes, because human nature doesn’t change. This cycle, I think the US is most like a modern Weimar Germany. Note that contrary to popular perception, the Weimar experience wasn’t a straight line, it was highly volatile, as should be the US experience.

    • David Richards Says:

      Also I concur, “favorite macro trader”, that China merits focus, yet it’s mostly overlooked by many. Despite China now being the world’s largest trader which therefore has the largest impact on the global economy. China isn’t just about China, but it also has a huge multiplier effect on Asia nowadays, which is the world’s most dynamic and large economic region today, both nominally and PPP, larger than the rest of the world – combined. Crazy to overlook that. As it’s a multipolar world now, at least financially.

    • kapilkhetan Says:

      David, if the US is most like Weimar Germany, could you educate me please: roughly which period of Weimar Germany are we in (1935, 1940, 1945?) and what did the German stock market do in that period ? Thanks

      • Yra Says:

        Kapi–let me beging by stating that Weimar ended by 1933 so I will let David finish it—but I would advise investing in Cabarets

      • David Richards Says:

        IMO most like early Weimar. Note I wrote “most like Weimar” in the context of the plights of the various nations’ central bankers described in the Lords Of Finance book. Weimar was characterized by unpayable high debts, weak currency, financial repression, rising consumer prices, rising asset prices (but not in a straight line), increasing volatility, and soft debt defaults via debt monetization, all like the overall trend in the US currently. Note there are some big differences too. Also note that Weimar existed from 1919 thru 1932 (full years) inclusive.

        Everything is best explained in the book.

        US policymakers say they’re going to target higher GDP, “invest” (read spend) massively, keep interest rates far below the GDP rate regardless of high inflation, run gargantuan deficits and let the central bank “finance” (read monetize) it. They don’t say it but this is to inflate away the debts that the US cannot repay. Just like Weimar (but not to conclude that the fate of the US will necessarily be the same as Weimar).

        IMO the alternative for US policymakers is Great Depression 2.0

        One way or the other, the US must deleverage. So must most of the world.

        A key difference from Weimar is the US enjoys its legacy reserve currency status. But to borrow from Powell, that’s “transitory”.

        QED, I think. BICBW.

      • David Richards Says:

        Kapi, I’d place the US in the inflationary boom phase currently. That’s easy because the year-over-year comparisons are so favorable now.

        But even as year-over-year comparisons get harder, the US inflationary boom should persist if policymakers get their way. Because it’s the nature of an inflationary cycle that it feels great early on. Like the go-go years back in the early part of the last, 1960s-70s inflationary cycle. Good times.

        But that’s inevitably followed by the inflationary bust which is decidedly unpleasant, like the stagflationary 1970s.

        So IMO, overall this still suggests higher US & foreign stocks and higher everything for now, but lower USD and treasuries (meaning the current recovery in UST’s is just a countertrend reaction).

        History suggests it then doesn’t go well for stocks later when this inflationary boom phase evolves into the inflationary bust phase. Then it’s precious metals’ turn to shine. Maybe some cryptos too but idk cuz I’m too old & dumb to understand those.

        Some nations like Germany and China fear inflation as they’ve seen in their history how inflation leads to societal instability and revolution (think communism and naziism). Whereas others like the US fear deflation (think the 1930s and 1870s depressions). Divergent national fears cause divergent national policies. So currently we see extremely loose US monetary & fiscal policy while China is tighter to tame inflation, plus also we witness the contrast between Germany’s Schauble and America’s Brainard, as described in Yra’s excellent post recently.

        Divergent policy creates investment opportunities. For example, fixed income investors should have and stil should prefer Chinese bonds over Treasuries. Foreign investors of US stocks and property should have and still should consider hedging the dollar. As historically, currency and inflation tend to trend for years at a time.

  2. Financial Repression Authority Says:

    […] Link Here to the Blog Post […]

  3. The Bigman Says:

    Well that didn’t work… Last Wednesday when Fed increased 5 bp on reverse repo interest operations were 520 billion yesterday these increased to 765 billion up 46% Interesting to see if anyone asks Powell about this today

  4. Pierre Says:

    The way I look at the “jobs mandate”.

    If you tell whole bunch of people to stay home and not go to work, at first the people will fight you to want to go to work. After a year, a whole bunch of people start thinking, “hey, this ain’t so bad”. They’ve adjusted their finances and living arrangements.I don’t think nobody just waited on the couch for the green light to “go back to work”
    It’s whole lot easier to get people not to work than getting people to work (again).

    • Chicken Says:

      “Two weeks to flatten the (covid) curve”

    • David Richards Says:

      Yes, and also perhaps the same result if to go to work, they must be injected with an experimental gene therapy drug that has unknown medium-to-long term health consequences? Maybe some would rather wait-and-see so stay on UBI indefinitely?

  5. Chicken Says:

    Anyone besides just me feel fortunate they don’t live in Chicago?

  6. kevinwaspi Says:

    And why are the police in the background at the presser wearing masks? WTF?

    • The Bigman Says:

      So you can’t see them grimacing when the mayor says only 10 dead and 65 wounded is making strides….

  7. Fred Geschwill Says:

    “As a moral philosophy this is to be applauded. However, as the stance of the world’s most significant central banker with the fiduciary responsibility of the world’s reserve currency it is to be abhorred.” Probably the single most important point to make IMO. Thank you YRA

    • Yra Says:

      Fred –thank you i believe that is an accurate summation of the present situation.I t is easy to applaud Powell and yellen as his predecessor but the outcome has been far from certain and will it be a smooth /paint drying operation or will it be like Sartre’s No Exit—-this is the dilemma confronting the world’s investors over the next years and I have no dot plots.

  8. David Richards Says:

    Further to my earlier reply above on divergent CB policy and opportunities, there’s this related quote today reported from John Mauldin’s Strategic Investment Conference by Felix Zulauf, the 72-yo Swiss ex-HF mgr now managing his own $2B family office.

    “I think at the present time, the one central bank that is operating very differently is China. China is tightening monetary policy. They are also tightening fiscal policy. They are creating decent positive real rates of return in the interest rate markets. In the fixed income markets. Because they understand that if they want to perform well long term, you need high savings rates. You need interest rates that attract money… I think they are actually maneuvering in a much more capitalist way when it comes to economic policy. Whereas the Western governments and central banks together operate in a much more socialist fashion by bailing out everybody and helping the system and taking the high price of leveraging up the system, which is becoming a danger over the long term.”

    In addition, Evergreen Gavekal (the firm of Yra’s regular guest, Louis Gave) today published a good article. It describes why, as I’ve tried to explain in previous posts here, the US must and will for years intentionally run high inflation, devalue the dollar, surrender its reserve currency status, target nominal GDP growth and do all it can to push US stocks higher in nominal terms. While Chinese (actually Asian) fixed income bonds will be excellent steady investments, if not stocks. The ariticle doesn’t attempt to pick a winner or loser, but rather how investors should position with both to benefit from the policy divergence.

    • Yra Says:

      Dave–I read both of those and believed the same as you—-Zulauf I am proud to say reads the blog and we exchange notes infrequently and the Gavekal piece on China is for bonds and U.S. for equities I had to read twice it was so good—but very much of what you ,Mik Temple,Asherz and myself have discussed in so many blogs—–thanks.

  9. Chan Says:

    yra- a lot of very good nuggets here…I am praying the interest rates go up but 10YR is dropping hard like a rock… my understanding is 10yrs dropping, AUD/JPY dropping and our dear SPX riding higher.. very abnormal and broken market. I am unable to figure out. With you experience can you share what might be the potential scenarios that could play out (not going to hold you accountable! –as i accept the fact change is the only thing thats constant).

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