After FEDERAL RESERVE Chairman Jerome Powell’s Jackson Hole speech, the jobs data may have taken on added significance. Inflation was not a concern for Powell as that is considered transitory within the bowels of the FOMC. The failure of the employment situation to enable all who lost jobs due to COVID “through no fault of their own” has regained paramount importance.
Wednesday’s ADP report revealed the private sector created 40% less jobs than anticipated (374k versus a consensus gain of 640k). The problem with Friday’s release is it always tends to be a VOLATILE number because of education jobs gaining ground in August as school restarts. This year will be more difficult because of the uncertainty of public education and its response to the DELTA VARIANT. Consensus calls for 550k, a 5.3% unemployment rate and average hourly earnings gaining 0.4%.
Don’t rush to race the headlines because the ALGOS will drive the trade. Give the markets time to digest the contextual basis of jobs and see if Powell’s concerns are realized in the August data and that employment remains well below the FED‘s mandate of full-employment. If the DATA is weak expect the DOLLAR to weaken, GOLD TO RALLY, BONDS TO ATTAIN some strength as it will push back the central bank’s desire to CURB ITS ASSET PURCHASES. It’s also LABOR DAY WEEKEND so be very patient as trading will not be as liquid as desks will be vacant due to the holiday. PATIENCE FOR THE NARRATIVE TO UNFOLD.
***In response to Sunday’s BLOG POST there was a question from Andy about the direction of the yield curve in the coming months. My response: Would you rather buy a 5-year note with a REAL YIELD of -160 basis points or a 30-year bond with an effective NEGATIVE REAL YIELD OF -30 basis points? This is not a rhetorical question but one on which I’m ruminating as the basis of how I look at the curve in a world where the sovereign debt markets are fighting against the tide of central bank intervention.
It is not just the FED but the ECB and BOJ that investors have to consider. The 10-year German BUND has a NOMINAL YIELD of -37 basis points with an inflation rate approaching 3% for an effective real yield of -3.4%. The question can only assuage investors if they have a stock portfolio that rises each month as NEGATIVE REAL YIELDS CONTINUE TO PROMOTE ELEVATED STOCK AND HARD ASSET PRICES.
On Thursday, former BOND KING BILL GROSS shared his thoughts with the investing world in Bloomberg and Financial Times articles that lashed out at “GARBAGE” Government BONDS. Gross called U.S. Treasuries TRASH and certain to lose investors money. Will Bill Gross be correct in his call that 10-year Treasury yields will rise to 2% over the next year?
If so, while Gross would relish SHORTING the longer-end of the CURVE, I find the 5-year sector to be the most overvalued of the TRASH based on effective real yields. Treasury NOTES are capital instruments which long term investors buy for coupon interest and hopefully some capital appreciation. My view on the initial market response to non-transitory inflation is that the most overvalued will be slammed the hardest even though it is HISTORICALLY THE LONGEST DURATION THAT SUFFERS THE MOST UNTIL THE FED REACTS TO THE BOND MOVEMENT AND RAISES THE FED FUNDS RATE. With the massive amount of central bank intervention in the bond markets these are anomalous times.
The FED‘s massive balance sheet of fairly short duration leaves the central bank to exert some facsimile of YIELD CURVE CONTROL, buying more DEBT further out in time to keep the Treasury’s borrowing costs under control. The creation of the STANDING REPO FACILITY, which could total a TRILLION OR MORE WITH THE FOREIGN INVESTMENT component — is a massive tool of YCC. It is for this reason I would see the CURVE FLATTEN.
Also, the ECB‘s massive intervention in EUROPEAN SOVEREIGNS can send global investors in search of higher nominal yields as an alternative. Trash is a relative term in a global financial system dominated by central bank actions. As ECB President Christine Lagarde warned the markets on July 22, the pandemic led to firms and households taking on more debt to weather the strains of demand collapse, which has made the European financial system fragile. Searching for yield across the globe can make one person’s trash another’s treasure. No easy feat in a central bank-controlled world.
Tags: Bill Gross, central banks, Federal Reserve, FOMC, inflation, Jerome Powell, nonfarm payrolls, QE, U.S. Dollar, yield curve control
September 2, 2021 at 7:23 pm |
[…] Link Here to the Article […]
September 2, 2021 at 10:28 pm |
If Gross is right, and how can you argue with what your lyin’ eyes tell you and Treasuries are Trash, what do you call the ammunition the Fed uses to control the yield curve? The warm green paper coming out of the printing press? The dollar:
And how does 2+2=5 explain the inability of the ultimate hard assets, precious metals, to move ahead at the pace of other assets like, equities, some other commodities, houses, etc. while some Euro sovereigns and Gross’ trash not reflecting fundamental analysis?
Could the answer be that “there are no more markets, just interventions?” YCC accompanied by GCC, Gold Control Curve?
The Truman Story continues in this make believe world. The successful investor in the last decade has been the one playing with the House while the fundamental analyst has been left in the dust.
Reality can be overlooked for so long but at the end the protagonist walks out of the movie set of Truman and the bright sun replaces the artificial lights that have lit up the financial world.
September 3, 2021 at 4:55 am |
Following up on Asherz’s comment, over the years I have saved a few quotes relating to gold that have resonated, at least to my mind. This is one, from Jim Grant:
“Monetary heresy is the biggest threat to not only this country but to the world. I think the suppression, the manipulation of interest rates, seemingly a recondite and technical thing, is a clear and present danger to human life and commerce as we know it. Interest rates are these critical prices that determine investment hurdle rates… and you discount future cash flows with them. And if interest rates are nonsense, if they mean nothing, what does that say about how people allocate investment dollars? …I think that central banks are making a nonsense of the traffic signals of a market economy.
I think what (Jay Powell) aught to start doing is saying ‘We have got a problem and the problem is, try as we might, we have missed our market and we can’t neutralize rates.’ Which means that the accumulation of investment errors, the accumulation of bad decisions, precipitated through fake interest rates, these bad decisions accumulate and we will have a problem called a recession or a fanatical panic…
The case for gold is that the monetary system has been deformed and the currencies will inevitably be debased. …2% inflation a year makes a meaningful difference in your cash positions over time. Central bankers are striving for inflation. They are acting as if all the rules have been torn up… All these things point to a coming comeuppance with respect to the nature of money itself… I think that the move up in the gold market, which has been going on for a while, maybe is the dawning of the marginal moneyed person saying ‘Ah, I don’t like this anymore…”
September 3, 2021 at 8:51 am |
The opposite. They will deflate the jobs numbers and continue to create “COVID crisis” (aka Delta scare) as they need that to continue to manipulate the market with low rates and bond purchases. The Gov will continue to manufacture data that fits whatever narrative it needs. Biden just said at 10:42 EST the economy is strong (OK, so start taper Fed!). Fed says inflation is in check (but we all know its out of control) so they don’t raise rates. Whatever lie they need to put out that allows them to print money and keep rates low they promote. They have themselves in a corner and have no choice.
September 3, 2021 at 11:00 am |
Nice article….IMO the Central banks are caught in a conundrum…….can’t taper because the economy is starting to weaken and can’t ease because that would be a signal they think the economy is in trouble.
September 4, 2021 at 8:03 am |
As I posted in the “Powell’s Pathetic Posturing” Notes a few days ago, “Glad to see you retract your bet. It’s becoming clearer each day that Jerome likes the spotlight enough to invoke the Rahm Emanuel “never let a crisis go unused” strategy in keeping rates lower for longer and maintaining asset purchases. If U9 unemployment falls, wages won’t rise enough. If dollar swap lines aren’t enough to provide safety, new tools will be forthcoming. If the Mideast lapsed into “peace in our time”, then global climate change will be the mandate of choice. With an unlimited number of reasons for Jerome to don his Superman cape, I expect he’ll outlive me in his present role. Financial Repression IS the “new normal” as Mohammed would say.”
Friday’s employment report hits the first example: not enough workers making not enough money, can’t taper yet!
We are in this do-loop of lies, damn lies, and statistics that Dave points out to perpetuate rigging markets by central bankers. New normal indeed!
September 7, 2021 at 8:20 am |
Sept 7 Germany’s inflation hit 3.9%, the highest since 1993
http://www.geopoliticalcalendar.com
September 24, 2021 at 6:41 am |
As an investor in silver, gold and property since 1966, I can attest to the fact their value in terms of paper money is not reflected in their market price. Stocks have advanced with inflation, supporting the change in technology at the expense of a gutted manufacturing sector. Our world-wide covid-based governments have proved they can impose total control over every day living. Shops, restaurants, entre families and their fortunes are wiped out. Everything from forest fires to gun violence appears to be out-of-control in our new normal. We live in a fragile world and the earth weeps. BDiamond
September 27, 2021 at 3:40 am |
Sep 27 Being the next German chancellor is like playing James Bond after Sean Connery. Germany after Angela Merkel
http://www.geopoliticalcalendar.com
September 27, 2021 at 10:26 am |
Curious what you think of this trade recommendation to short yuan.
https://maroonmacro.substack.com/p/issue-21-trade-idea-short-cnh
October 13, 2021 at 3:27 am |
Yra, hope everything is going well. Missing your insights!!
Oct 13 Poland’s constitutional court: Polish laws have supremacy over those of the European Union in areas where they clash
https://geopoliticalcalendar.com/
October 17, 2021 at 10:31 am |
Arthur –all good thanks for asking just been laying low but tonight will post a podcast and some thoughts on where we are—Bigman comments are the sense of a return to stagflation but this is what has been proposed by Rogoff/Reinhart –this time is different—-lots to discuss as elections in Canada and Germany are over and Japan embarks on a snap election October 31,st—but most of the crap is just rehashed nonsense over the meaning of tansitory
October 15, 2021 at 10:57 am |
Let’s see Gold down $27 on retail sales beat but consumer confidence down on inflation expectations of almost 5% next year doesn’t sound promising to me Sounds like back to the future. Hello McFly. It’s the late 70s
October 17, 2021 at 7:29 pm |
Bigman and Yra- The big difference between the late 1970’s and the period of Stagflation and today is total DEBT! The result at day’s end will not be stagnation and inflation, but the Bugaboo that Bernanke, Yellin and Powell have done everything to avoid… It is a ten letter word that begins with a D and ends with as N. It can’t be mentioned by name. It will have been self-inflicted by the disastrous policies of the Fed over these last 30 years.