Notes From Underground: We’re Back?

It has been quite an extended period since my last post, but now I’m trying to catch up on some reading and relevant research on all things pertinent to GLOBAL MACRO. Following the FEDERAL RESERVE’S INTEREST RATE DECISION and the POWELL PRESS CONFERENCE, I sat down with Richard Bonugli, Peter Boockvar and Daniel Lacalle. This 66-minute podcast is packed with several pertinent topics, including yield curves, the dollar, Europe and even ESG investments. Please enjoy and I await your feedback and hopefully disagreements. Only the parochialist in echo chambers pursue validation.

Click here to listen to the recording.

One of the critical discussions taking place in the mainstream media is the issue of whether the U.S. has entered a RECESSION.This is nonsense except for the need for sensational headlines. Yes, the standard definition for the last few decades is two successive quarters of negative growth as determined by the National Bureau of Economic Research (NBER). This has always irritated me as the NBER announcement always came after the economy had already started to experience growth.

Before the FOMC started trying to CONTROL yield curves and sovereign debt prices, the markets were very adept at signaling economic conditions. The desire of the FED to control debt prices has led to a breakdown of bond markets as signaling mechanisms. Even the US central bank has admitted they ought to be more humble. Whether or not we are OFFICIALLY in a recession is just political narrative landscaping as an effort to generate the newest designs on the citizens tax payments.

We keep out of politics here at NOTES FROM UNDERGROUND in order to prevent it from undermining the quality of discussion. So we’re going to take the recession narrative and shove it. That has no home here. Yield curves will provide more data if they are allowed to FREELY BREATHE. The current 2/10 inversion, moving toward the lowest levels since 2000, is bothersome and reflecting the slowdown seen in corporate guidance: Walmart, AT&T, Verizon and some credit agencies are all experiencing some stress due to overextended consumers. Auto repossessions are rising even with unemployment residing near record lows.

Mr. Boockvar was very early in catching delinquencies on AT&T consumer payments. Walk the streets of Anytown, USA and it is a sure thing that people will not jeopardize their cell phones. The consumer data is beginning to reflect an economic slowdown but how deep it goes is far from known. Will it be enough to scare the FED into a softer approach to curbing inflation? Powell did say that NEUTRAL for interest rates is deemed to be 2.25-2.5% even as headline inflation measures 8%. Naturally, Larry Summers immediately took Chair Powell to task in a Bloomberg Television interview on Friday. 

Before Summers’s critique, the markets responded immediately to Powell’s comments in response to a question from Financial Times reporter Colby Smith. All asset classes began to rally immediately upon the belief that Powell was putting down a “dovish” marker. The asset rally continued as equities soared, precious metals reversed their recent selloff, commodities gained renewed strength and the yield curves slowed their flattening. Most importantly, the DOLLAR closed lower on the week, reversing pre FOMC gains.

The strong dollar is not a blessing in these tumultuous financial conditions as it places a great deal of stress on the world’s emerging markets, which are BORROWED in US DOLLARS due to the FOMC’s flooding the global system with very low interest possible loans. Cheap dollar loans become expensive when interest rates rise and the cost of DOLLARS rise along with it. A classic case of this was in January 2015, when Eastern European countries borrowed in Swiss francs because of low Swiss interest rates coupled with a guaranteed level of euro/Swiss franc at 1.20, A NO BRAINER.

But when the Swiss National Bank could no longer hold the PEG the market panicked and the SWISS FRANC rallied in dramatic fashion, leaving borrowers stuck having to repay with expensive Swiss francs. This is the current situation confronting the massive amount of loans held by private and public emerging borrowers with prior cheap dollar loans. This is just the beginning of this important discussion. 

A note to our readers: After more than 1,500 posts at this site, we will be migrating our musings to Substack in the coming weeks. My hope is that we can make this as seamless as possible so as to ensure subscribers will still receive Notes From Underground (yes, we’re bringing the name with us). Stay tuned for more updates. — Yra 

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9 Responses to “Notes From Underground: We’re Back?”

  1. mikegre2014 Says:

    I’m don’t like listening to podcasts. Can you, Yra, manage to have transcripts available?

  2. Yra Says:

    Mike–I will see what we can do–thanks for all your great support over these many years

  3. Darragh K Says:

    Yra, thanks again for another great discussion. Your comments regarding ESG and trying to parse fact from fiction, or fashionable from unfashionable, on environmental matters are spot on. I work as Environmental Engineer (specialized in contaminated site remediation) and have spent a lot of time over the years thinking about this exact issue. I have identified two overarching themes which I think are useful: 1) as a standalone industry the environmental industry is very new and still finding its feet. Age old fields such as architecture and engineering have been around for hundreds of years and are grounded in hard facts, based on experience and observations over that time. These fields are now, at least in part, being directed by Environmental programs and goals developed by environmental specialists coming through university faculty of arts programs, with little or no training in the hard sciences. The best way to understand the impacts of this change is to speak to experts in the well-established fields (particularly the engineers), they understand why things were done the way they were and what impact the changes will have. The new Arts graduates do not understand the implications of their actions. 2) When trying to analyze the feasibility of a new environmental product or program, which entails considerable technical nuance; it is wise to look closely at the financial incentives of those involved and the checks and balances placed upon them. The industry has strong incentives to present findings leaning in one particular direction and there is currently no good mechanism to balance this out… other than catastrophe when it all goes wrong, as is the case of European energy policy. The greater the incentives, with the least independent (truly independent…) audits, the more likely the plan is fundamentally flawed.

    Here is my feeble attempt to answer your request and find some disagreement with the contents of the interview! Early on Richard asked Daniel if he saw any possibility of a 2008 like financial crisis to which Daniel promptly disregarded the possibility, saying it would not be allowed to occur. How can he be so sure? I realize that trying to predict when or how a financial crisis might occur is probably a fools errand, but surely that risk is currently elevated as you keep mentioning the many problems the strong dollar is creating. I’d love to hear more discussion on this aspect. Lawrence McDonald is one of the few people I hear discuss this possibility.

    Thanks again for all of your hard work Yra, much appreciated!

  4. Pierre Says:

    Good to have you back Yra. I’m glad I can come here and get updated on the global topics. Thank you. Two comments.

    Maybe Exxon is getting a better ESG rating than Tesla because of their “Carbon capture and storage” program?

    https://energyfactor.exxonmobil.com/reducing-emissions/carbon-capture-and-storage/capturing-carbon-around-the-world/

    I have also been wondering about the USD/HKD, it has been trading or pegged in a very tight range. Is there a reason for this?

    As always, love being able to come to this blog and educating myself.

  5. Richard H Papp Says:

    To Darragh K: Your “hands-on” experience as an Environmental Engineer parallels what universally has happened and will continue to happen! That is, where the “young and/or powerful” seem to think they know what is best.

    As to Markets: Almost every Bear Market at some point produces a crash-like action or chaotic collapse as in 1929, 1937,1946, 1974, 2000, and 2009. Then there was Black Monday in the later 1980 as an interruption in the Great Bull Market ending 2000 and continuing! So, have no fear that history will repeat itself as these present markets move along!

  6. Darragh Kilroy Says:

    To Richard H Papp: I always enjoy identifying the link between “bottom up” and “top down” views of any market or industry. Markets price in the top down and where the bottom up disagrees are where the opportunities lie! Yra is correct to call out these inconsistencies as he sees them. If you scratch the surface of the “E” in ESG you will find more and if you dig a bit deeper you will find the two themes I have identified above are often causal factors.

    I suppose there is not much point in focusing too much on what a crisis would look like, as you point out it is just a chaotic collapse! I’m just amazed when I hear economists rule out the possibility completely. There’s probably a good a reason why historic interest rate charts from the early 80s to the present are a descending staircase, and if we are about to break that trend I guess we will soon find out what that reason is. I recently listened to a banker talk about this, in his opinion another financial crisis across several countries simultaneously could be too large for many sovereigns and too large for the IMF to handle. How many emerging markets could the IMF bailout before they reach capacity? I would guess a true crisis would be one where the bailouts fail.

    Apologies for the ramblings of a macro tourist who is way out of his depth. Thanks again for all the great content.

  7. David Richards Says:

    Mikegre – you can get a complete transcript for this (and others) on the page in this link below. Click the 3 horizontal dots to the right of SAVE, then click Transcript and it’ll pop up in its entirety in a window on the right.

    • David Richards Says:

      Addendum… The first step to get the full transcript is to play this video and then press “youtube” near the bottom right.

  8. AZRondo Says:

    So good to have a reasonable person to provide insight and opinion on economics that do touch us all. Will applaud the move to Substack.
    Regarding the U.S. Fed, I don’t much care anymore what they say. The interest rates and currencies are something I do care about.
    I’ve always been a cynic when it comes to politics and markets, and now driven to the point where I expect the politicians to do nothing that is “no harm” and anything they do will be harmful to a mere citizen in this Kafkaesque world we live in. Remembering the 1963 film adaptation by Orson Welles of “The Trial” – that was probably how my perspective started, as yet a lad not old enough to drink alcohol.
    Now, I plan to do the opposite of whatever the wealthy fools who trundle off to Davos each winter suggest. They are so enraptured in their own self-importance, that they are a parody of History of the World, with perhaps a soundtrack by Loudon Wainwright III.
    Biden has been the perfect Gov Le Petomane since the 1980’s.

    One point on environmental engineering – It really is an ancient science as humanity (men and women) survived through figuring out how to manage waste and maintain cleanliness, while using the resources available to improve their lives and win wars. The rest is of negligible value. I subscribe to Genesis 1:26 + We were given dominion (I read into that the meaning stewardship) over the earth and all that dwell in/on it – by God.

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