Notes From Underground: Neutral

On Friday I sat down with Richard Bonugli at the Financial Repression Authority and Doomberg to discuss the current situation in global energy and tried to peek into the future as to where Europe and the US are going to find the means to provide dependable and affordable energy to power economic growth. Enjoy the podcast and hopefully it will lead to more high levels of discussion on all things global macro.

Click here to view the podcast. 

In the last 10 days we have seen two sets of economic data upon which the FED‘s dual mandate is most dependent: unemployment and inflation measures. The jobs data was very strong while the price measures showed a slowing theme, especially as GAS prices at the PUMP have trended lower for several weeks. The result has been that the markets have gone back and forth on the theme of 75 basis points versus 50 basis points at the next FED meeting in September.

The market is currently leaning toward 50 basis points, which is perceived as a DOVISH hike so myriad of asset prices have found support as buyers look for asset classes that appear cheap in the face of the proverbial SOFT LANDING. For us at NOTES FROM UNDERGROUND this is the definition of NEUTRAL as it reflects trading opportunities. The EQUITY markets have recovered more than 50% of their first-half losses stoking the call from WALL STREET that it is all clear WEENA. BUT I CAUTION: This is not an INVESTING MARKET BUT TRADING MARKET as we await to hear from Chair Jerome Powell on the FED‘s future path, especially as the central bank’s balance sheet reduction ramps up to its maximum levels next month. NOBODY can be certain of the impact of removing liquidity from what has been an over-leveraged market living on the liquidity drug provided by QE.

It was then-Chair Ben Bernanke 12 years ago at Jackson Hole that provided the “morphine drip” to ensure what he defined as the PORTFOLIO BALANCE CHANNEL, or forcing savers to take money from their mattresses and place it in riskier assets to unleash capitalism’s animal spirits. When bond investors and depositors wrote letters to the FED complaining of no interest earnings in a ZERO RATE INTEREST RATE policy environment, Bernanke and future Fed Chair Janet Yellen both called for interest earners/rentiers to stop complaining and celebrate their rising stock portfolio, home prices and celebrating that their children and grandchildren all had jobs (this is fact not a false narrative).

Is Powell going to claim that the age of the RENTIER class has been revived as interest rates are now providing some modicum of revenue? Yes, real yields are still negative but its getting better all the time. Eighteen months ago $1 million dollars of a one-year TREASURY BILL earned $1,500. Today, that would net investors $32,000. Times are changing and as QT hits full speed how much will this affect returns for bondholders? We don’t know but if the FED were to get to a TAYLOR RULE-type of neutral in an effort to defeat inflation, several asset classes are going to several a downward movement. NEUTRAL is a place policymakers aspire to but investors will find difficult to navigate. See you in Jackson Hole.

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13 Responses to “Notes From Underground: Neutral”

  1. Bob Zimmerman Says:

    Very informative Podcast. Thank you!

  2. fredhavell Says:


  3. David Richards Says:

    Good morning, Yra. For a huge and cheap energy source globally, maybe we can harness the practically unlimited hot air blowing from the politicians’ mouths?

  4. Michael Hobson Says:

    Thank you for shared high end thinking. But, Q. What is a ‘fact vs false’? ie that the kids all had jobs or that the statement alluded to was made erroneously to support FED narrative, etc (in light of contrary data, please?

    ‘..Bernanke and future Fed Chair Janet Yellen both called for interest earners/rentiers to stop complaining and celebrate their rising stock portfolio, home prices and celebrating that their children and grandchildren all had jobs (this is [fact] not a false narrative)’

    • yraharris Says:

      michael—-that what bernanke abd yellen both said instatements therfore iwas not creating a false narrative in order to make the point–iwas almost quoting verbatim

  5. Asherz Says:

    We are a little over 10% off an all- time high, inflation is at 8.5% which is being cheered in comparison to 9.1%, earnings are trending down, we are probably heading for recession or are already in one, the Fed is in a QT mode but FF are over 6% behind the inflation rate, and risk on has returned. Why?
    The traders were too bearish and most piled on to the short side. Short covering has been a catalyst. FOMO is alive and well. But another acronym has been surreptitiously lurking around. PPT.
    The Fed unstated mandate number one is to prevent a market crash. And they have been very adept at managing that feat despite the fundamentals, which don’t count anymore for now. When will the charade ends, is anyone’s guess. But it isn’t two years or maybe one.year away..
    “Nothing is as it seems. “

    • David Richards Says:

      Yes, this unwritten mandate to protect US equity markets from falling is a relatively newer function, whilst in contrast, the Fed has long been concerned with countering a collapse of credit markets, protecting the banks and the functioning of the US Treasury market.

      Today the US is a fully financialized economy so the stock market IS the US economy. So US policymakers are forced to prop stocks or else the US economy and US tax receipts will plunge together and bankrupt the US due to its high leverage & government external debt-to-GDP ratio (google US Debt Clock and check the numbers in red at the bottom right – excluding the $31-trillion of US Federal debt, the US off-balance-sheet “hidden” debt is an additional $530K per person and rising, mostly for unfunded entitlement & defense commitments).

      I read from Luke Gromen recently that currently, US entitlement spending is 90% of US tax receipts, leaving only 10% of tax receipts available to pay for interest, education, defense, and all government spending. Thus the exorbitantly high level of debt-financed spending and bloated Fed balance sheet. They’d not even begun QT before the talk of a QE pivot again. As the math is the math.

      Any QT will be short-lived, unless they prefer a 1930s-style depression, as US policymakers know they have no choice but to prop the markets and gain some tax revenue (and “print” the rest like to “pay” for their new, misnamed Anti Inflation Act), or else their entire house of cards will quickly collapse. These are the same geniuses who solve high gas prices via Gas Stimmies and draining the SPR. So they will also QE into high inflation. Expect that new ATH in stocks, at least in nominal terms, lay ahead as sure as does next summer, if not in a straight line.

      So BTFD, STFU, and celebrate your rising stock portfolio, home prices, and that your children have a McJob – at wages falling behind the rising cost of living which will probably structurally rise. The Davos solution I hear about now is that home and stock owning boomer parents should substantially help to pay their millennial kids’ way right now, and then die ASAP to facilitate a generational wealth transfer to the millennials who need it to make ends meet in the screwed-up, inflating economy. They say the kids will spend their parents’ money which will help the economy, whilst the dead parents who were aging & unproductive will no longer be a burden to unfunded healthcare systems nor to the global climate by exhaling CO2, eating, and farting.

      It’s a big clown show, in which the jokes aren’t funny.

      • yraharris Says:

        david and asherz—-thanks for your eally fine posts.The FED is just going until something breaks as Jim Bianco maintains but there is no inner Volcker as Mr.Richards and Asherz maintain in seeing a 1930s style global liquidation which is everything Bernanke and Company have sworn to prevent—-if the world had full faith and credit in the FED preciousmetals would be collapsing and the Dollar soaring and theUS interest expense would be increasing crushing so many discretionary spending programs even before we employ the poltics of appropriation

    • David Richards Says:

      Something to consider about the unoffical Fed mandate to prevent a stock market collapse. US financial conditions today rate as extremely easy. That can turn inflation higher again, while they’re supposedly fighting inflation. So this might necessitate more interest rate hikes than otherwise. In contrast to two months ago when tighter financial conditions were helping with the inflation fight and reducing the need for interest rate hikes.

      So from an inflation-fighting perspective, slowly falling stock markets are helpful to the Fed. But that will put a big chill on the US economy because it’s so financialized, which would not be so much the case for an industrialized economy.

      That’s a quandry.

  6. Fred Geschwill Says:

    I am leery in a election cycle. How much political pressure will be applied up until Nov? That is not a dig on any given admin. They all have mud on there faces when it comes to our current situation.

  7. ARTHUR Says:

    Yra, great podcast!

  8. Trader 1 Says:


    EU – the project was held together in low int. rate + low inflation + Central Bank QE World—- how are they going to be able to hold EU together in the New Economic World??

  9. ARTHUR Says:

    Sensing a market bottom, wealthy investors are moving back into stocks

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