If you’re only looking at the headlines from the past 48 hours, there is something major going on. First, on Friday afternoon Bloomberg reported that the G-7 finance chiefs are planning to discuss inflation as prices soar and the Financial Times followed on Saturday about the U.S. Democrats pushing the Federal Reserve for tougher action against inflation. These two stories are everything that we at NOTES FROM UNDERGROUND have been discussing since the Dems’ poor election showing last month.
The White House polls — and thus the political operatives — reflected that inflation concerns were going to be the biggest issue for all Democrats in 2022, which is why there was a sense of urgency to use SPR and release oil to drive headline energy costs down. It’s the classic political ploy to appear to be doing something. What’s next? Wage and price controls?
This situation, though, reflects the ACADEMIC response of running inflation HOTTER FOR LONGER TO ENSURE MORE JOBS AND MITIGATING THE PAIN OF INCREASED DEBT TAKEN ON BY HOUSEHOLDS, FIRMS and GOVERNMENT OVER THE LAST DECADE. It was the work of Kenneth Rogoff and Carmen Reinhart back in 2012 that theorized that running higher inflation for a few years would be a positive thing to repair financial balance sheets. This idea became de rigueur and as the COVID pandemic led to more debt as unemployment grew, Fed Chair Jerome Powell utilized this theory to promote the concept of “flexible adjusted inflation targeting” at Jackson Hole in 2020. If inflation had run under 2% for many years it would be justified for price rises to exceed 2% for quite an extended period of time in an effort to smooth out the average. Unfortunately, the political calendar is not the reality in which the economic theorists reside .
The G-7’s VIRTUAL meeting that takes place Monday is critical as there are five central banks releasing policy statements this week: the FED, SNB, BOE, ECB and BOJ. We have argued that there needs to be COORDINATION among the major G-7 economies in order to prevent a MASSIVE DOLLAR RALLY if the FED were to end its QE program as a solo endeavor. A dollar rally would place an extreme burden on dollar debtors around the world, especially those who borrow in dollars but earn in an alternative currency. It seems the G-7 has adopted this and wants to coordinate ahead of the meetings this week as all the banks are key promoters of MASSIVE ASSET PURCHASES. Listen to what transpires in this virtual meeting of G-7 finance ministers and central bankers as IT CAN FOAM THE RUN WAY FOR ENDING THE GLOBAL QE PROGRAMS.
The use of FORWARD GUIDANCE as a key policy tool has painted the central banks into a corner that they can only escape by coordinating the end asset purchases. THE MOST HAWKISH OUTCOME OF THE FED THIS WEEK WOULD BE TO END ALL PURCHASES OF SOVEREIGN DEBT AMD MBS AS IT WOULD MAKE ALL OF 2022 FED MEETINGS LIVE FOR RAISING RATES. Powell’s FORWARD GUIDANCE PROMISES WERE THAT THE FED WOULD NOT BEGIN TO RAISE RATES UNTIL TAPERING OF BOND PURCHASES WAS COMPLETED.
Powell needs to end the support for asset markets, which have been the key beneficiary of QE policy. In Powell’s role as minister of justice he has maintained that large scale asset purchases were supporting jobs for those who were unemployed “through no fault of their own.” The latest jobs data reveals that the emergency of unemployment ended and now the need to slow the rise of prices for basic necessities has become the most important challenge to better the lives of those on the lower rung of the economic ladder. Is the stock market ready for an abrupt end to large asset purchases? WHO CARES?
Jim Bianco raised the question in our most recent podcast. When the FED shifts its policy who will be the most harmed, BOND HOLDERS or STOCK HOLDERS? Jerome, the White House is hoping you deliver COAL TO THE OWNERS OF EQUITIES FOR THEY HAVE HAD AN INCREDIBLE RIDE. Besides, if the central banks coordinate this endeavor, they may be seeing success in nine months just as so many elections are taking place. Remember, the U.S. cannot go at it alone. The markets Sunday night OUGHT to be volatile as they try to prepare for a busy week of central bank policy outcomes.
***ECB President Christine Lagarde will have a difficult time if there is coordinated ending of QE. When she first assumed the position, Lagarde made a major faux pas by proclaiming that it was not the ECB’s job to keep sovereign debt spreads in order. Italian and Spanish debt got crushed, causing her to proclaim she was misunderstood. Watch the European sovereign debt spreads as an indicator of a sea change for the central bank because the current levels of the spreads between German debt and all the weaker states will not be able to be sustained.
Another negative outcome of FORWARD GUIDANCE is Lagarde will lose control if the ECB stops its buying unless it agrees to only buy the weaker countries, which would be a violation of its mandates and the Lisbon Treaty. There is a lot at stake in the global financial system but waiting longer will not resolve the difficult challenges. Are those equity investors ready for their coal?
Tags: central banks, Christine Lagarde, debt markets, Federal Reserve, G-7, Jerome Powell, QE, U.S. Dollar
December 12, 2021 at 12:53 pm |
Yra, very good blog.
IMO, if the G-7 pulls back from QE and the FED indicates it is ready to start raising rates soon, Stock markets and some Credit markets around the worls will get hit substantially.
I hear multiple time a day the FED is “behind the curve”. OK, they should have tightened sooner. However, the Treasury Yield curve is saying that even the minor tightening that may occur next year, is enough to choke off the economy and inflation.
If the FED were truly “behind the curve”, the long end of the Treasury curve would be getting demolished now……the opposite is happening……it gets bought by investors every time it breaks.
December 13, 2021 at 9:06 am |
Shocked: My sentiments exactly.
Bond market knows the real economy cannot stand much higher rates (R* trending lower) and the Fed hiking cycle will be short lived as they will be forced to pause, and eventually, reverse course well below 2%.
Meanwhile, supply chain issues will take years to resolve. What happens if Inflation remains stubbornly high over the next few years? Will Fed be forced to cut rates in the face of 2+% inflation?
Remember markets today are pricing in 12-18 months into the future. Watch the hedge against CB credibility for evidence this possibility is being Priced in.
December 12, 2021 at 1:46 pm |
Shocked
Well said. Stocks and bonds have almost never been more highly overvalued. Against a backdrop of plunging liquidity as CBs withdraw hundreds of billions of support (if it is globally coordinated), a big market splat is almost inevitable.
Consider the following scary facts
1. At March 2020, US households directly owning stocks (not in their 401Ks) stood at 18%.
Today, it is 50%
2. Equity stock inflows in 2021 will reach $1T
This equals the cumulative inflows of the past 20 years!!
3. Crypto fun fact….50% of all Bitcoin wallets came into existence in 2021.
4. ARKK/Cathy Wood. Law of large numbers.
Over half the ARKK investors are underwater, despite her heralded success. How? On dollar weighted basis, investors flocked to ARKK in the past year as her performance has imploded.
Without Tesla, her portfolio would be stunningly down for the year, not just 40% off its Feb highs.
As CBs withdraw liquidity, Mr Bianco is right that stocks and other story situations will collapse. In fact, watch as BTC implodes alongside Nasdaq high fliers.
Is it any wonder that ringmasters like Elon and the AMC CEO are furiously selling their shareholdings?
You are also correct to note the bond market.
In particular, the curve has been relentlessly flattening, a very ominous development. Also note that the deferred Eurodollar curve just inverted two weeks ago on the Omicron news.
Yet, with Omicron fears fading and stocks rebounding, the inversion remains. So, this points to an EASING just as GS is pounding the table for 7-9 rate hikes and as the last holdout, Morgan Stanley, there in the towel this weekend and is now reluctantly calling for 2 rate hikes in 2022.
As Yra points out, Powell won’t hike until AFTER he ends the QE. So, perhaps a faster taper is in the cards this week.
Stocks will no longer have the wind in their sails.
Final observation….Regarding Europe.
If ECB halts purchase of PIIG debt, how quickly will we see angst and agita regarding the fact that Germany’s Target 2 reserves are now at 1Trillion euros, nearing its ATH.
Further sign of huge financial imbalance.
Given how strong the bond market still is in the face of all this CPI inflation, how low will yields plumb if stocks get destroyed in 2022 and the negative doom loop of stock market wealth destruction slows down the real economy? Something like 30% of home purchases this past year have been partially or fully funded by crypto gains.
Watch as that ball of yarn unravels if RISK OFF hits all markets.
How many “investors” have adopted the mantra of WWED?
What would Elon Do?
He is SELLING
Nuff said
Mike
December 12, 2021 at 3:07 pm |
Michael….Great synopsis.
December 12, 2021 at 4:25 pm |
Michael and Shocked – I agree but IMHO that’s a trade instead of the trend probably not yet complete.
PS. O/T but isn’t Elon selling cuz of the much higher taxes there next year and that “unrealized gains tax” nonsense? Crystalize taxable gains now. Nancy Pelosi is selling too, so next year she can pick your pocket, nuff said.
December 12, 2021 at 2:38 pm |
Yra
By the way, a lump of coal has turned out to be quite the stunning asset here in 2021.
Perhaps we need a different metaphor.
December 12, 2021 at 4:23 pm |
LOL, right. So instead, how about a lump of gold?… but that’s ok cuz the more it gets hated, the more we should like it (the opposite of last year when gold ran >$2000 and got over-loved).
December 12, 2021 at 4:42 pm |
About that “raise interest rates” and “reduce fiscal spending” blasphemy to curtail inflation… No-no-no, don’t y’all know, that’s discredited old-school stuff; today it’s the MMT era… We’re more enlightened now. C’MON, MAN!
Instead we now simply change how inflation is measured – then PRESTO like magic, inflation disappears! Not joking – it’s already in-progress now with the BLS (Bureau of Lying Statistics) per Zero Edge:
https://www.zerohedge.com/markets/and-just-inflation-about-disappear
December 14, 2021 at 11:43 am |
David –did 70 minutes this morning with Michael Pettis—hope to have it out soon
December 12, 2021 at 5:15 pm |
One of your best blogs Yra, Watching the bund to the fbtp and other peripherals, for overall risk assets.
December 13, 2021 at 7:18 am |
Just posted the blog from a month ago—-Andrew thanks yet again
December 12, 2021 at 6:14 pm |
Dave
While I have a negative outlook, I certainly don’t know when the train will depart/arrive.
ROC, rate of change, is now slowing
Yet, liquidity will still be added for another 3 months.
So, I am quite willing to admit that stocks can continue higher well into 2022. But, Yra could be right. The taper could finish quite quickly to allow the hiking to commence soon thereafter.
For the life of me, I can’t foresee how stocks shrug off both tapering and the first rate hike without a huge hiccup.
If stocks do crash, especially after taper is completed but before an actual Fed hike, does the front end of USTs go NEGATIVE?
I think that is more likely than a resumption of QE after such a fall
Before 2022 ends, Cathy Wood and ARKK will implode.
Arkkageddon, with ARKK dropping well below $50, especially if she keeps buying the dips
Mike
December 13, 2021 at 7:18 am |
https://yragharris.com/2021/11/14/centralbankdilemma/
December 14, 2021 at 9:58 am |
I’m not sure but haven’t gold/silver/spongebob.coin lost a bit lately?
December 14, 2021 at 11:43 am |
as they should has central banks try to reclaim credibility—and today the IMF presses UK to raise rates–chutzpah
December 14, 2021 at 4:00 pm |
[…] Anyone who bothered to read Yra yesterday morning was given a heads up. https://yragharris.com/2021/12/12/coal/ […]
December 14, 2021 at 11:12 pm |
“How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually and then suddenly.”
“What brought it on?”
“Friends,” said Mike. “I had a lot of friends. False friends. Then I had creditors, too. Probably had more creditors than anybody in England.”