I’ve been away minding my two Floridian grandsons (exhausting yet delightful). I did, however, have time to catch up on some reading, particularly W.E.B. Du Bois’s “Suppression of the African Slave Trade,” as recommended by Chris Whalen. Du Bois looks at how the large state-domiciled banks helped finance the importation of African black slaves. This is high quality prose written in 1896, a well documented and enlightening read about the politics of America at its early beginnings. We could all stand to learn from a genuine scholar rather than shouting at each other.
Also, I followed up the Du Bois with a reading about China from many different perspectives. The markets seem to be, once again, caught up with fears of a rapid rise in covid’s delta variant. There is definitely some position unwinds, as well as some market participants hedging against positions for a potential redo of March 2020.
But seen in the context of the massive deleveraging that occurred in the spring of 2020, the current market action does not even register on our RICHTER scale. The SPOOS remain 90% above its lows of March 23, 2020 and almost 27% above the all-time highs that it had made in the previous February. The BONDS have recently rallied in anticipation of some rising uncertainty but the 30-year bond is resting just above the levels of February 23, 2020.
While traders are certainly cautious there is NO PANIC. The primary difference from 16 months ago is of course the FED having moved to the ZERO BOUND so yields are just too low at this juncture to attract those in search of a haven at any price. The critical question remains: IF THE ONSET OF THE DELTA VARIANT INCREASES GEOMETRICALLY, WHAT WILL BE THE RESPONSE OF THE MONETARY AND FISCAL AUTHORITIES? WHAT TOOLS REMAIN IN THE BOX? THESE ARE THE CRITICAL ISSUES CONFRONTING ALL INVESTORS WITH U.S. RATES AT ZERO.
Last Wednesday, I had the great pleasure of discussing these issues with Peter Boockvar and Richard Bonugli of the FINANCIAL REPRESSION AUTHORITY. It is certainly apropos to listen to the FRA podcasts for we are in the throes of a global scheme of FINANCIAL REPRESSION. This is the active policy to crush savers to keep the financial system buoyant in the short- to medium-term. Read the work of Professor Carmen Reinhart on Financial Repression to get some historical context as to where we are at, or where in the financial world is Carmen Reinhart? Enjoy the PODCAST.
Click here to listen to the podcast.
Tags: covid-19, Federal Reserve, U.S. Treasuries, yield curves, zero lower bound
July 19, 2021 at 2:56 pm |
Yra
With regard to Delta, isn’t the operative question whether hospitalizations and deaths spike higher?
So far, the vaccinated seem well protected and, perhaps, the sight of economic shutdowns in Australia, Japan (no fans at Olympics) and parts of Europe will convince health officials in Republican states, such as Tennessee, to reverse course and actually encourage vaccination.
Nevertheless, I thought I saw speculation that RBZ may already be considering a roll back of its recent tapering .
To me, the big question becomes whether the Fed may finally join the BOJ and SNB to buy equities as the next iteration of QE, if that is what Jerome is forced to do if stocks hit a big air pocket.
I will say this. I think the meme stocks may have finally “jumped the shark”. No guarantee of a collapse, but no question that the greatest speculative excess has been there.
.
Mike
July 19, 2021 at 4:00 pm |
Yra, I think this is the beginning of the Great Unwind…….Covid was just today’s excuse……..Delta has been serious for weeks.
If the market really starts to sink, I think the FED will go to negative rates and increase buying of bonds and bond ETFs………… If I remember correctly, they say they are currently buying “at least” $120 Billion/month, so can do more.
Credit spreads are blowing out, even though the FED is supporting junk ETFs.
The Euro FX is very close to major downside breakout……deflationary IMO.
July 19, 2021 at 4:13 pm |
Shocked–if that plays out as you design you will be right as will Lacy Hunt ,et al–deflation will be the theme of the day but we will stilll be left with what the FED will do to respond–because they are in so deep there is no out unless you follow the Rogoff script from the FT article over the weekend and of course the Rogoff-Reinhart book from 10 years ago–this time is different in which the call is for a few years of 4-6% inflation
July 20, 2021 at 3:35 am |
Yes, it’s called a correction if we get one (the last mini-correction in May was rapidly snuffed with intervention before it materialized).
Initial key support and resistance levels aren’t even broken yet in most markets and FX. But OMG, stocks are down a fraction after setting a hundred ATH’s this year, and junk bond yields are “blowing out” from negative real yields so PANIC.
Yes delta is a convenient, welcome excuse for policymakers to do whatever. Because they can’t blame years of mismanaged public policy for their bind. No, it’s delta. Next time, blame gamma, an even less life-threatening seasonal variant, which is how viruses evolve at the hand of Mother Nature in an attempt to survive; more contagious but less life-threatening than the previous iteration. And less of a threat than the public policy response.
July 21, 2021 at 10:58 pm
‘Twas only a down day or two, not even a correction. FX, stocks, bonds generally rejected rather than breached key levels. Maybe different next time but don’t hold your breath. Money printer go brrrr and credit being pushed; and China changing course from its recent tightening to a new credit impulse helped save the world from deflation too for now. We now return to our regularly scheduled programming.
July 19, 2021 at 6:53 pm |
[…] Link Here to the Blog Post […]
July 20, 2021 at 3:37 am |
Isn’t the Fed tightening financial conditions now with reverse repo?
Cash is leaving the banking system. Was Jerome and company afraid of breaking the USD when they saw rates go briefly negative in the money markets.
I admit I don’t understand it fully, but common sense tells me the USD will take priority over everything.
Not to say they could lose control of it, I get it.
July 20, 2021 at 7:57 am |
Pierre—not sure I follow here—–yes velocity of money slows as more gets parked at the FED with RRP and IOER but that is not new–what do you mean Dollar will take priority?
July 20, 2021 at 5:04 pm
Hi Yra, thank you for your patience.
When I say “priority”, I mean to say, “the most important”.The Dollar is more important than equities and elevated asset prices.
Just my train of thoughts,
*Didn’t this RRP start when the money market rates touched on going negative?
*Wouldn’t negative rates be detrimental to the Dollar? (The reserve currency of the world.)
*Could the Fed be afraid of losing control of the Dollar with negative rates? (and with it Reserve Currency status)
If reverse repo takes cash out of the system, haven’t we technically started a tightening cycle?
July 20, 2021 at 4:00 am |
Thanks. Yra!
Bear in mind that the Greek alphabet has 24 letters, and Delta is only the fourth. We already have Kappa (B.1.617.1), first identified in India, now spreading in Australia — but did I miss Epsilon, Zeta, Eta, Theta and Iota?
https://www.bloomberg.com/opinion/articles/2021-06-27/niall-ferguson-get-ready-to-live-with-covid-s-hassles-forever
Jun 29 The global pandemic of 2023 dramatically reduced global travel in an effort to contain the spread of the disease, contributing to the slowing of global trade and decreased productivity—potential scenario, National Intelligence Council, January 2017 See May 1 http://www.geopoliticalcalendar.com
July 20, 2021 at 10:54 am |
David is right on target with, “Yes delta is a convenient, welcome excuse for policymakers to do whatever. Because they can’t blame years of mismanaged public policy for their bind. No, it’s delta. Next time, blame gamma, an even less life-threatening seasonal variant, which is how viruses evolve at the hand of Mother Nature in an attempt to survive; more contagious but less life-threatening than the previous iteration. And less of a threat than the public policy response.”
Arthur is locking the sights on with, “Bear in mind that the Greek alphabet has 24 letters, and Delta is only the fourth….”
We have endured 13 years of financial repression and now are in the additional chapter of political repression. Study history, economics and politics are inseparable. Central banks are the conduits of socialist control everywhere.
I’m waiting for the Alpha Omicron Phi variant to invade the Delt’s house and force the next masked ballroom dance to the circular firing squad.
July 22, 2021 at 9:42 am |
Chinese car data suggest weakness in the economy
https://www.eiu.com/n/chinese-car-data-suggest-weakness-in-the-economy/
July 23, 2021 at 2:46 am |
Methinks it’s strong base-comparison effects as China (and all of East Asia) were already fully re-open a year-plus ago with several successive 18% quarters. So while the West pursued an historic pump-priming & fiscal binge, China was tightening, until recently reversing and loosening, as I posted above. So they’re a year ahead and already already stagnating. Japan is even further down as it’s actually deflating already with both falling inflation and economy. US and EU were much later to emerge from pandemic than East Asia so they’re relatively early in expansion still, then later should enter stagnation or stagflation. The big question IMO is whether it’ll be a “mid cycle adjustment” or end of a cycle. IDK but some cycles do seem to be shortening.