There was an article in Foreign Affairs this week by Graham Allison, the dean of American political scientists, titled, “Putin’s Doomsday Threat: How to Prevent a Repeat of the Cuban Missile Crisis in Ukraine.” The piece raises an important tactical question about escalating the violence in an effort to prevent a greater catastrophe similar to what President Kennedy was threatening in 1962. It’s worth a read as it was Allison’s book, “The Essence of Decision,” that provided the understanding of the bureaucratic mindset during the nuclear age. It provoked me to think that the escalate to de-escalate seems to be the paradigm of the FOMC as complacency over zero interest and transitory inflation has given rise to policy makers’ more hawkish jawboning. Uber-doves Charlie Evans, Mary Daly, Jerome Powell, Lael Brainard have been on a mission to find their INNER VOLCKER (at least rhetorically).
This week there were many comments about the central bank’s NEED to raise rates by 50 basis points at each meeting going into the FALL when the FED will be cautious heading into the November elections.
Question for data enthusiasts: How many times have the FED raised rates during the labor day/November elections?
On the balance sheet front, the minutes of the latest FED meeting gave markets a sense of just how fast policy makers the balance sheet unwind — or QT — will progress. We at NOTES have been more concerned about the impact of QT on an overleveraged global financial system, especially bonds, equities, commodities and real estate. As Peter Boockvar has pointed out, the maximum $95 billion a month unwind pace will be close to the same rate as when the balance sheet totaled $3.8 trillion back in 2017-19. (Remember, it’s almost $9 trillion now.) The impact from the minutes was that U.S. bonds were sold off with some significant correction in the 2/10 and 5/30 curves.
The FED has a potential problem in how to unload its stockpile of mortgage-backed securities without breaking the robust residential real estate market as rates are speeding toward 5%. When the FED sells $35 billion of MBS a month how much higher will MORTGAGES rise as buyers wait to receive even higher yields. (Or, as Chris Whalen suggests, a potential MBS buyer strike.) My point with the FED and why I come to bury Powell and not praise him is that the central bank kept increasing reserves even as the negative economic effects of the COVID pandemic were proven to be contained. The massive fiscal stimulus from Trump and Biden administrations should have constrained the monetary stimulus that has created enormous losses for BOND BUYERS during those 24 months. As Jerome Powell would says, through NO FAULT OF THEIR OWN.
As the FED searches for its INNER VOLCKER the next six months will be extremely volatile. Louis Gave and I discussed this coming period of heightened uncertainty in an FRA podcast on April 7.
Louis and I cover the world from U.S. dollar and the sanctions impact, global commodities, equities and the recent weakness in the Japanese YEN. (Louis has a very important view on the meaning of YEN weakness.) Also, what is the significance of the Turks dropping the prosecution of the defendants in the Kashoggi trial? Investing will not be easy in the months to come as inflation, war, high food prices and rising interest rates will add more instability. Listen to the podcast for some clarity. Oh, and did I mention the French elections are taking place today in which President Macron is suffering from all the things just listed. If you thought that 2+2=4, you haven’t been reading NOTES FROM UNDERGROUND.
Click here to listen to the podcast.
Tags: balance sheet, Federal Reserve, FOMC, Jerome Powell, MBS, QT
April 10, 2022 at 12:02 pm |
In discussing raising interest rates by the Fed in 2022 and invoking the name Volcker in the discussion, is like discussing how many coconuts you have when you find yourself on a deserted island, when comparing the same guy abandoned in a Whole Foods store.
In 1981 national debt was about $670 billion. Today, $30 trillion. Debt/GDP 1981 31%. 2022 130%.
All this talk about attacking inflation seriously by raising rates is as Ecclesiastes calls it Hevel Havalim ar in the vernacular Hot Air. If Volcker were to be Fed Chair today he couldn’t do what he did 40 years ago. That’s why the talk is about .25 or .50 increments to get us to 2 or 3 percent with inflation at 8% or if using 1979 CPI 16%. Get ready for uncontrolled inflation and shortages of everything. And not a great time to buy a house or the S&P 500.
The NY Fed trading desk is going to find their job in market interventions a lot harder than in the last decade plus. The music is playing but the dancers are getting very tired.
April 11, 2022 at 6:19 am |
Kudos Yra and Louis. Watched it twice. Awesome.
April 13, 2022 at 11:05 am |
‘It’s not written in stone, but that would be my guess’: Leon Cooperman joins chorus of billionaire investors warning of a U.S. recession
https://fortune.com/2022/04/06/billionaire-investor-predicts-recession-leon-cooperman/
April 11, 2022 at 2:05 pm |
Asherz, I respect your opinion and perhaps this all well and true. But if Volcker had been Fed chair today, we wouldn’t be in this situation.
Mr. Volcker solidified the Fed as an independent body but that went away almost immediately when Alan Greenspan under pressure for a win for President Reagan moved the goal post for measuring inflation. But back to the real problem, money supply.
Paul Volcker battled inflation in 1979 and he was able to target money supply directly, interest rates happened to be the tool for that tackling inflation. He di so as the Fed’s primary stated goal.
Volcker knew the dollar was in “existential crisis” and stated so explicitly. He was also well aware of the public’s lack of confidence in the Fed. Today’s Fed doesn’t seem to understand this as they behave, as Jim Grant famously said, “The Fed behaves as both arsonist and fireman.”
Mr. Volcker had doubts about the Fed’s ability to curtail rein in money supply through interest rates, but he had the tools to chase price inflation down. Today’s Fed doesn’t, and is oblivious to its primary role of controlling money supply.
I fear they do not not understand the gravity of the situation and that they have little ammunition to terminate the problem.
April 12, 2022 at 4:25 pm |
great podcast thanks Yra. Just watched after my AA meeting. Keep the GOOD stuff coming
April 14, 2022 at 6:13 pm |
Thanks for the podcast!
So, in my limited understanding.
The Yen and Euro are still racing to the bottom.
The USD is gaining strength on higher interest rates and a risk off trade.
Bond yield charts look like bitcoin charts.
I’m paying triple for deodorant at the store.
I heard a theory about how the USD will be the last currency to fail because all other currencies are tied to it in some respect.
I’m thinking Bretton woods.
Maybe the Euro will break apart first and that will be the final warning to get into gold.
Just my thoughts from the peanut gallery.
Hate to be pessimistic, maybe they can still get this under control.
April 15, 2022 at 4:29 am |
Hi Pierre! How the Euro will break apart? Drivers? Scenarios? Thanks
April 16, 2022 at 3:56 am
My friend, you’re asking me? Now that I think about it, the Euro was not even in existence when Bretton Woods happened.
How will the Euro break up? Maybe the Euro will be the last to go.
The USD was originally tied to gold and all other currencies tied to the USD. Once the dollar broke its link to gold, does this mean all other currencies broke their link to the dollar? From what I gather the answer is no. Please let me know if I’m wrong.
I am always reading about how the USD will fail, but at the same time everything continues to be priced in USD’s. If Putin sells his oil in Rubles, do they not look at the price of oil in USD’s first, and then make then make the conversion into Rubles. Same with Bitcoin.
The increased strength of the dollar will break the links one at a time. As the links break each individual fiat currency will become worthless.
Please tell me if I’m thinking of this incorrectly. Or how I should be viewing it differently.