Notes From Underground

On Tuesday, I sat down with Richard Bonugli and Danielle DiMartino Booth. We traversed Ukraine, Europe, the U.S. and Danielle delved deep into the her expertise of the Federal Reserve. We discussed the recent work of Zoltan Pozsar as it has had such a great impact on the current state of global financial markets. This sets the table for Richard’s next FRA Roundtable, which will feature Mr. Pozsar, who is one of the more knowledgeable financial “plumbers.” Pour your favorite WHISKEY as the financial system is explored for potential profits involving commodities, currencies, yield curves and tangentially precious metals.

Click here to listen to the podcast.

***As I maintain, I do not come to praise Fed Chair Jerome Powell but to bury him. I am perplexed as to all the adulation of the FED CHAIR, who has brought us a quantitative easing strategy that remained in full force long past its efficacy except for those owners of hard and paper assets.

Wall Street has been enriched as Powell kept the liquidity flowing even as the central bank grew nervous enough about INFLATION to raise its concern and refer to it as transitory. Instead of pulling back from the massive monthly monetary infusions the FED just kept the party going. WHY? Inflation was beginning to sustain itself and yet there was no change to QE. The question was whether it was bonds or stocks that were in the throes of being a genuine BUBBLE.

What we heard was that the jobs situation continued to warrant maximum monetary stimulus as Powell postured that the FED would not rest until “all those who lost jobs through no fault of their own” found work. This is what NOTES referred to as Powell accepting the MANTLE of MINISTER OF SOCIAL JUSTICE. As headline employment was dropping below 5.5%, Powell, along with Secretary Yellen proclaimed REAL UNEMPLOYMENT was closer to 10%. The failure of the EMPLOYMENT PARTICIPATION rate to regain its pre-pandemic level gave the central bank all the cover it needed.

Further, at Jackson Hole in August 2020 Powell announced a policy, FAIT or flexible adjustable inflation target, which would allow the economy to run hotter for longer even if it meant inflation being sustained above the 2% target for a considerable duration. The result has been inflation far above the FED‘s target with no easy fix available except the urge for Powell to call upon his inner-Volcker as the FED attempts to discover an OFFRAMP from the pains of sustained price increases.

The White House is cognizant of the political fallout from a Middle Class struggling to meet ever higher food, rent and energy costs. The FED is trying to curb headline inflation but how high will rates have to go to throttle prices (especially as the Russian invasion has wreaked havoc on global commodity costs)?

President Biden has noted that responsibility for inflation resides with Putin. And, in a very hawkish Powell speech on Monday  at the National Association for Business Economics the FED Chair said, “Turning to price stability the inflation outlook had deteriorated SIGNIFICANTLY this year even before Russia’s invasion of Ukraine.” The problem is that even as Powell accepts that reality the FED kept a modicum of QE in place curtailing it a mere three weeks ago. That’s MALFEASANCE of the highest order.

The question for traders/investors is how high will rates have to go before headline economic activity begins to recede? If the FED chooses to not raise its key target rate above 2% and embarks on an aggressive shrinking of its BALANCE SHEET how much DELEVERAGING OF THE FINANCIAL SYSTEM will take place before highly leveraged asset classes begin to deflate? It seems that there are more questions than answers, but as the FED has promoted a policy of “LET A HUNDRED ASSETS B[L]OOM” how do they exit? This has been a question we at NOTES FROM UNDERGROUND have been asking for 12 years. What is the exit strategy for this gigantic wager made by the custodians of the global reserve currency? 

Tags: balance sheet, bubble, Federal Reserve, inflation, Jerome Powell, QE, unemployment

This entry was posted on March 23, 2022 at 7:49 pm and is filed under Fed. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.