Notes From Underground: Bye Bye, Jerome Powell

Early last week Senator Elizabeth Warren made her case against Chair Jerome Powell. In a Financial Times article, the senator blasted Powell for his light regulatory touch while praising the efforts of Governor Lael Brainard. Yet many believe Powell is a shoe-in to be reappointed Fed Chair (as much as an 85% chance at some sites).

It was Warren who killed off Larry Summers in 2013 along with her anti-Wall Street cronies at the time — Senators Sherrod Brown and David Vitters. It appears that Warren will block Powell and look to place Brainard in the chair position as she is on record as being a CONSISTENT promoter of easy money in an effort to run the economy hot so as it raises the situations for the lowest rungs of the economic ladder.

Last year Brainard delivered three speeches on yield curve control prior to Powell shutting-down that discussion at Jackson Hole. The New York Times published a story citing with certainty that Brainard was to be President Biden’s Secretary of Treasury. (See? Even the Paper of Record gets knocked off its hubristic pedestal forecasting through the MUCK of Washington politics.)

There have even been the regular chatterers proclaiming it is unusual for a president not to reappoint a FED Chair when things are proceeding so well. Oh yes, President Trump replaced Chair Yellen in 2017 so, BYE-BYE Jerome. Wall Street has had a love affair with Powell as he admitted his mistake in the second half of 2018 and PIVOTED HARD TO KEEP THE MONETARY PUMPS at equity market speed beginning in January 2019. If you loved Jerome, you will adore Lael.

***Friday’s unemployment report delivered close to consensus, except for the RATE, which dropped an unexpected 0.5% to 5.4% from 5.9%. This was a dramatic decrease and sent tongues wagging that the FED will now be able to begin TAPERING by the end of this year. In response, the DOLLAR RALLY, PRECIOUS METALS CRUSHED, COMMODITIES DEPENDENT ON THEIR UNDERLYING FUNDAMENTALS and of usual outcome EQUITIES (HIGHER, except for the interest sensitive NASDAQ).

My concern is not that the markets performed in this direction but rather the analysis done at all the financial outlets is that the FOMC can now proceed with tapering. Zerohedge ran a piece with comments from six Wall Street financial analysts all proclaiming how the jobs report would allow the U.S. central bank to begin its move to reduce its asset purchases. All economists cited the AGGREGATE DATA but I posit this: Powell has not been talking about the aggregate JOBS data. He falls back into the “Ministry of Justice” position, decrying those who have lost their jobs and suffered diminished wages through NO FAULT OF THEIR OWN.

At Powell’s press conference the other week, he constantly discussed how he was concerned about BLACKS and HISPANICS being unable to return to a pre-Covid employment situation. Why is it that Wall Street analysts disregard the chairman’s concern about those at the bottom of the wage pool? Hypothetically: If aggregate unemployment is at 5%, but black and hispanic unemployment is at 9%, DOES THE FED TAPER? Remember, it has been Powell and Yellen who regularly cite REAL unemployment being closer to 9.5%. This jobs report was strong but not enough to change that data in a meaningful way.

If Powell’s concerns are so easily diminished then bring in a new FED chair. If it is Brainard, then the dovish outlook at the FED will prevail. Can a Biden White House entertain anything other position as massive amounts of national debt need to be financed with ever lower rates? It’s political economy not graduate finance at BOOTH.

***On Aug. 3, the St. Louis Fed published a blog post titled, “Dollar Exposure in the Public Debt of Asian and Latin American Nations.” Dollar debt has not grown as dramatically in Asia as it has in Latin America, a good outcome. The piece cited the Institute of International Finance that governments around the globe added $24 trillion to global debts to combat the deflationary effects of Covid.

This was only a small proportion in DOLLARS but it contributes to the massive debt load hampering the global financial system. This is what worries Hunt, Rosenberg, Shilling

The St. Louis Fed raises this concern, which we at NOTES has been pointing to: “Because economic conditions in the U.S. have improved significantly since last year and there are many signs of inflationary pressures, the situation in some emerging economies could become worrisome. If the FOMC … decides to raise interest rates at some future date, this could spark capital flight from emerging economies and thus depreciate their currencies.”

The noose tightens for a strong DOLLAR will create havoc on so many of the world’s most vulnerable economies. When does not fault of their own splash across the OCEANS? Those espousing an end to the global reflation trade due to FED policy pivoting be very cautious. All those in favor of a strong dollar raise your hands, otherwise keep the MUSIC PLAYING AND THE WALL STREET CROWD KEEP DANCING. Hey Joe, you may wish to change partners.


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12 Responses to “Notes From Underground: Bye Bye, Jerome Powell”

  1. kevinwaspi Says:

    The expectation of Fed tapering is much to do about nothing. Friday’s report will have nothing to change the minds of those in control, be it Jerome or Lael. Each expresses a different reason for the same easy policy, both exacerbate the income and wealth divide with the same foolish policy prescription. Hubris is the virus of leadership, at the Fed, in academia, in politics. Welcome to your “new normal”. Debt, is just another handcuff on the prols, like the masks that don’t filter any virus molecules.

    • David Richards Says:

      Indeed, Fed tapering is much ado about nothing and impractical given the combination of a high 130% federal debt-to-gdp ratio, the need to lower it not increase it (ie., inflate away a portion of the federal debt in order to restore some normalcy), and the ongoing huge deficits that can’t/won’t be fully funded by private markets at the negative real yield policymakers need (to inflate away a portion of the debt).

      Therefore I expect there’ll be no real tapering or real rate hikes (ie, interest rate minus inflation rate) for many years. Instead I expect the Fed’s balance sheet will grow markedly by being the buyer of last resort, and I expect *real* interest rates to trend lower (to inflate away the debt). Fed tapering is just empty “talk” to try to perpetuate some participation in the bond market on the part of private investors for those like the great Lacy Hunt who apparently still believe the current circumstances are part of the regularly recurring cycle, rather than a far less common restructuring of a sovereign debt blowup in slow-motion due to national insolvency – which is where the US is today and has been since Repo blew up, as I tried to explain in Notes back then but didn’t convince anyone, I think.

      So IMO, dollar bondholders will be big losers in the long run. They’ll be sacrificed on purpose in an attempt to inflate away the debt and restore some normalcy. So far, the Fed is doing a masterful job of hiding that intent via jawboning. If the intended victims become wise, then expect greater financial and political repression to that end. So get out while you still can. And obviously this isn’t a Fed-only, US-only situation.

      • Yra Says:

        David—you have indeed convinced many as investors but as ever trading is far different .But the discussion you promoted lingers on in many places I go to discuss these very important issues.You can buty a bond to trade as an investment absolutely not -we are in the early innings of this “conflict”—watch the coming German elections for I think the issue of financial repression will be front and center —as I warned Jens Weidmann was out with an interview over the weekend cited in Reuters—Lagarde has kicked a hornets nest as well revealed following the ECB meeting.The history of financial repression has not been well received for too long in very many places except the Soviet Union and China had nothing to repress

      • David Richards Says:

        Yes, actually I was going to add that I’m talking about the big picture, which as usual won’t be a straight line. Nothing really new here when we look far enough back in history, which shows directions do change temporarily and markets get volatile. Everyone knows that countertrend reactions can rip and try to knock you off your horse.

        While I believe the Fed’s balance sheet will continue growing, probably to gargantuan levels, the Fed might temporarily attempt to reduce asset purchases or even attempt a rate hike, but not both simultaneously after last time. However, given the macro environment, I suspect that if they try to raise rates or cut asset purchases for long, markets will puke and policymakers will quickly acquiese, stop and resume “Project Zimbabwe” again (h/t to Harris Kupperman for the codename). They won’t continue to be less loose if things begin to puke and threaten a collapse of the fragile economy & markets. Not Brainard nor Powell nor even myself TBH under that pressure – history shows that policymakers in analgous circumstances before knew better than to monetize but the pressure was unbearable.

        Policymakers have painted themselves into the proverbial corner so what lies ahead is fairly predictable. Thus asset allocation for longterm investors is relatively easy. Geography is the hard part IMHO.

  2. Adam Says:

    Interesting to see the “unemployment” rates as so many companies across the country are begging for workers. How does the continued or at least previous support of “Biden Bucks” to people play into this equation of unemployment. Many aren’t unemployed because there are not jobs but because they choose to be.

    A company not only has to pay as much or more than what the government is paying but so much more that the individual sees the opportunity cost of sitting at home doing what they want not as advantageous as getting a job.

    If this doesn’t make sense i’m a couple of kentucky mules into the night, so ….take it for what it is and my 2002 economics degree.

  3. Financial Repression Authority Says:

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  4. ShockedToFindGambling Says:

    Good article Yra

    1) Non seasonally adjusted NFP employment fell 133K, even including a big jump in teachers hired in July (which should not happen)….something is not Kosher here.

    2) I don’t know how you could be much more dovish than Powell

    3) Euro looks like a major breakout if closes under 175.50 IMO…..weekly oscillators are oversold

    • David Richards Says:

      Good eye and analysis on NFP, reaching beyond the reported numbers. Employment is a lagging indicator, but in addition, leading indicators like US buying plans for durables, homes and autos have crashed. Some other forward-looking data not good either. Altogether possibly portending a downtown several months from now. But for now it might be US stagflation, not deflation, following in the stagflationary footsteps of China which is already months into stagflation and ahead of US in the business cycle, having already fully recovered from the CoV slowdown far earlier and then slipped again.

  5. Pierre Says:

    Just putting in my 2 cents here, for what it’s worth.

    The whole trillion dollar infrastructure bill does not make sense to me while we are still in the middle of this pandemic.

    Like most on this blog know, I work at a hospital.(major over 600 beds) We went from having 15 COVID patients here a couple of months ago to over 140 patients as of today. WTF!

    I guess, in my mind, the “rebuilding” phase should come after the crises, not in the middle of it.

    How do we “rebuild” infrastructure while people are being admitted in droves to hospitals?

    • Yra Says:

      Pierre–you are a very respected and long time commentator and reader of NOTES–this one though you are narrowly focused on your world which we all respect but the infrastructure bill goes way beyond regardless what the press focuses on—for many lower wage workers roads,bridges,airports schools and we can go on will provide work and capital investment for the future—was a fan for the last decade and hoped Trump would promote it with a tax increase on some to pay for it while also cutting corporate taxes—we got none of it and this is not political but a policy rebuke for that group.I am more interested in the discussion about REAL UNEMPLOYMENT that Powell and Yellen have opined about—-if the counterfactual is REAL UNEMPLOYMENT OR REAL INFLATIO N I say let’s get REAL and have a genuine revelation of what this means and what OUGHT to be the policy repsonse to the REAL.

  6. Fred Geschwill Says:

    To start with I am having a hard time believing that this inflation is as “transitory” as the fed and pals would like us to believe. I believe a portion will be but I think a lower portion than a higher one. And now the narrative is shifting to rising rates, will it be sept, oct or Thanksgiving/Christmas. IMO any rate hike or tapering will be short lived. The market will react negatively regardless of the need and try to “scare” the fed into keeping the IV firmly inserted. Lastly, the apparent need of the fed to be the deliverer of social Justus, I guess that will go out with the bath water, Powell and company has been adding about 3-4 percent to the unemployed number. Is that just going to evaporate or will we just forget that it ever existed. I for one don’t think they give up on social justus, just look at the reaction to pressure that was applied when the eviction moratorium was lifted. I don’t think it remained lifted for even one weekend. I am not blaming anyone in particular but the fact remains that the paint will not dry and gov. is stuck in a distant corner off the ball room.

  7. david Says:

    could be when the fed makes taper announcement the market actually rushes higher for 5000 SP to crush any remaining poor short sellers and then over-heating panic begins and they raise rates only to finally crash the market back into the 3800 area?

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