As I go into hiatus I am posting a PODCAST recorded on September 20 with world renown Professor Dr. Alhajji, in which we discuss global energy and its implications on global politics and finance. The Financial Repression Authority, under the auspices of Richard Bonugli, has provided a wonderful platform for allowing me to discuss the most relevant global macro topics with the leading thinkers in the realm. The wisdom of Mr. Bonugli allows for ferreting out investment ideas — both long and short — to help provide insight and profit for readers of NOTES FROM UNDERGROUND. Enjoy the podcast and I look forward to writing after the period of the Jewish Holidays as I’m in need of deep introspection. Wishing those who celebrate a coming year of health, peace and prosperity, and for those of other beliefs I wish you the same.
— Yra
Click on the link to view the podcast.
My takeaway from the Jerome Powell’s post-meeting press conference Wednesday is that Axios and Politico asked the most important questions on the balance sheet and global financial conditions. Axios asked if the FED was concerned about the global impact of the central bank’s quest to stamp out the rise in US global inflation. Powell maintained there is no coordinated concerns about the US strategy as each country has its own domestic concerns so while the FED is aware of the rising dollar everyone is the mind that each bank has to do what it needs to do. Of course that very evening the BANK OF JAPAN intervened to support the YEN by selling dollars after the BOJ left its current negative rate policy in place. (The BOJ intervention came as the currency reached the highest level in 24 years.)
Maybe there are some global concerns about the DOLLAR and its impact on rapidly tightening global financial conditions. In my opinion, Chair Powell has made a categorical mistake by bringing the FED into the November election discussion as Senator Elizabeth Warren was on the attack immediately following the FED meeting, accusing Powell of lacking concern for the lower-wage earners by seeking to increase unemployment as the cure to high inflation. As an aside, the New York Times and Washington Post reporters asked questions about the potential pain for American workers.
More importantly, the Center for Economic and Policy Research (CEPR), published a piece on Monday warning the FED about pushing interest rates too high as the economy is currently in weakening mode. What’s notable is the piece was written by two major voices on the left, Joseph Stiglitz and Dean Baker, who act as a powerful voice for many in Washington. Powell is in the discussion — as was Paul Volcker in 1980, a role Mr.Volcker sought to avoid. As the pressure builds pay close attention to the yield curves, which are now deeply inverted, as any hint of Powell slowing down the rate increases due to pressure. That should result in a relief rally and steepening of the curves from current levels.
In closing, I would like to raise this issue. In response to the last question from MNI reporter Jean Yung, Powell noted that the FED seeks to raise the FED FUNDS rate to a positive 1% real rate of yield, something we at NOTES have discussed in many blog posts. In fighting inflation it is important to use the overnight interest rates as the key weapon, something that Jerome Powell accomplished in the fourth quarter of 2018 when the inflation rate was 1.7% and the FED FUNDS rate rose to 2.5% to 2.75%, thus a POSITIVE REAL YIELD ON SHORT-TERM MONEY. The problem between then and now is that the 2/10 yield curve never inverted in that period even as equities, bonds,p recious metals and commodities were getting slammed. Maybe the inversion in the 2/10 is signaling that Baker and Stiglitz are correct in their forecast. I would advise reviewing the results of all asset classes in the fourth quarter of 2018 as a guide. Again, wishing everyone peace, health and prosperity to the entire world.
Tags: Bank of Japan, Fed Funds, Federal Reserve, Japanese yen, Jerome Powell, US dollar, yield curves
September 25, 2022 at 3:26 pm |
Good post.
Was reading today about how far behind schedule the
FED is on QT…..especially MBS, which they were net buyers of last week…..probably think the bond market can’t absorb it.
QE will begin again in 1st/2nd Quarter 2023, I believe.
September 28, 2022 at 1:45 pm |
Agreed. Like BOE today.
Also, yield curve control?
As inflation may partly retrace lower, but then it’s probably going higher as they resume QE concurrently with sticky inflation and broken globalization (very inflationary), so then nobody will buy UST’s.
I was reading analysis that foreign bond holders, who of course play a large role in funding the USG, have never been more keen than now to sell treasuries (thus the poor UST auctions and rising rates)…they sold almost $200-billion this summer even BEFORE Japan’s sale of UST on Thursday ($25-billion?) to buy/support JPY/USD, but the fun is just starting as foreign governments still hold another $7.5-trillion of UST.
I can think of two main reasons for foreign gov’t selling: one is political risk as explained months ago by Zoltan Pozsar, and second, to defend their currency without raising interest rates (which “weakens their economy”). If so, then Japan’s FX intervention on Thursday may have just been the start of more international selling of those $7.5T of trasuries. Will the BOE be next to sell in order to defend GBP, as I’d imagine the pound will continue getting pounded as the BOE just surrendered today to high inflation and resumed QE.
If foreigners are selling UST, then how can the Fed do QT?… Who will buy these large treasury issues, especially at still-negative real yields? Only the Fed, ofc.
September 29, 2022 at 9:41 am
david—exorbitant privilege or exorbitant burden–but the parochialists occupying the policy making space have a domestic concern when the prairie fire has been lit by Powell no matter how much they pretend otherwise
October 7, 2022 at 10:09 am
Yra, I think that fire was lit a long time before, planting the seeds of the destruction for later.
But if you’re referring to the Fed’s policy mistake under Powell that threw gas on the fire by overheating the economy in 2021 as rates were kept too low too long whilst blowing out the balance sheet, I actually think that to be fair to him, he had to acquiesce to that due to politics? His term was ending in spring 2022. Everyone in the new Admin was keen on MMT and ZIRP, and had he not played ball, then he’d be out, and we’d probably have an uber-dove Chair Brainard instead with bigger problems.
I “get” that Powell tightening into a recession can be considered another policy error, but this is the bed that they made for him and he went and laid down in it, but perhaps he appears to at least appears be trying to get out of it (tho I think it’s futile due to reasons I’ve written about before).
As Fed-watcher Danielle DiMartino Booth has said, “Powell didn’t sign up for another term as Fed Chair because he wanted to underwrite socialism in America”. Like the alternative Fed chair candidates were keen to do and even advocated. So we’ll see.
As for the rest of the world, I think “it’s our currency but their problem”. Not everywhere is having problems from it, but the financially reckless ones are. Which is most but not all. Sound money could have precluded it. So for the long run, maybe that’s where we need to get back to, even if the medicine & therapy will be painful. One way or anther, it’ll probably come to be, eventually.
October 2, 2022 at 1:32 pm |
Remember Jerome’s NOT-QE quantitative easing in 2019? Well, Jerome is now engaged in NOT-QT quantitative tightening, LOL
September 26, 2022 at 5:44 pm |
Since there is only one comment so far today, i thought i would review the Big Picture for our newer followers. With the penetration of the June lows of the Dow Industrials and Transportations Av. last week, the continuation of the Bear Market is assured. The Bear is now 11 months old with the last joint highs in the beginning of Nov.,2021. As a bonus the movement last week was on expanded volume. It should be noted that Dow Theory just gives direction but neither duration nor extent. But we surely lack the capitulation component with 6 of the first 20 most active stocks on the NYSE up.today. with AAPL leading the pack
The Utility Average was one of the last holdouts with a new high this spring. Its recent action is now in harmony with the Bear and higher interest rates.
Of particular importance is the Advanced/Decline Ratio going to a new low last week on the NYSE. This means that the $Trillions of losses are thru the whole market and i dare say Internationally.
Yra, thanks for your continued fine work and i hope that folks find this helpful!
September 29, 2022 at 6:09 am |
Does anyone else find the quick pivot by BOE a sign of extreme economic weakness and uncertainty in their own policies? I will probably be proven wrong, but I feel like the only person that believes the Fed. I don’t think they pivot unless there is an EXTREME externality (war, famine, real disease, etc.) For once I am not going to fight the fed as I learned my lesson the hard way before… I think there is more pain ahead for all asset classes.
October 3, 2022 at 6:27 am |
No, you aren’t alone in that belief. Marty Armstong fans will note that “The Forecaster” still says today, “The Federal Reserve is Raising Rates – Get Used to It”. By the way, he says others will do so too. So we’ll see.
https://www.armstrongeconomics.com/markets-by-sector/interest-rates/the-federal-reserve-is-raising-rates-get-used-to-it
Maybe they’ll keep raising interest rates (which are still negative on a real basis) whilst simultaneously growing the cental banks’ balance sheet?
That’s because they absolutely CANNOT simply continue to raise rates in isolation without bankrupting the treasury/government, crashing the financial system & economy. It’s simply an arithmetic, accounting fact.
Interest expense already absorbs tax revenue, plus there’s the need to fund entitlements + defense + mandatory spending etc (and discretionary spending like the misnamed Inflation Reduction Act which is now mandatory spending?).
Treasury issuance to fill that big gap between spending & revenue is already encountering difficulty getting absorbed. So interest rates must rise to attract capital, which #1 depresses the private sector and private debt & equity markets, and #2 exacerbates the budget deficit by increasing federal interest expense, causing a need to raise rates even higher to attract even more capital which futher increases the interest expense & deficit, creating a circular death spiral into a collapse of government solvency. So then they will either:
1) collapse, or
2) default on Treasuries + Entitlements + Defense, or
3) be forced to PRINT to fill the cracks.
So IMHO they WILL print and grow the Central Banks’ balance sheets. Lots. Forget QT!
Got gold?
October 7, 2022 at 9:12 am |
Here’s another one who is skeptical about the pivot. The always-brilliant Jim Bianco from Chicago this week talked about why Powell won’t pivot on rates, why inflation will persist and exceed expectations for years, the stress in the banking system, his outlook for stocks, and the paradigm shifts in the labor market and stock market that has already begun and will extend substantially over time.
https://www.youtube.com/watch?v=7VEoAJ8BB00
Also, to clarify my last comment immediately above, as I said I expect that we might get higher interest rates but also an increasing Fed balance sheet before long, instead of a shrinking balance sheet, for some of the reasons explained. Whether that’d be consider a “pivot”, I don’t know (semantics). But if the usual form for markets holds true, the fact that the vast majority have been expecting and waiting for a pivot soon, probably means it doesn’t happen or the opposite occurs. As has been the case since August and Jackson Hole, which numerous pundits had pegged in advance as being the probably pivot moment.
October 9, 2022 at 4:47 am
David,
Thanks for the links. Both well worth listening to.
October 10, 2022 at 5:56 pm
Glad you enjoyed it. Here’s another related, short note from today by Chris Whalen The Institutional Risk Analyst about why he expects there’ll be no Fed pivot for years and no pause until fed funds rate is 5%. Wow, we’ll see.
https://www.theinstitutionalriskanalyst.com/post/will-the-fed-pivot-or-pause
October 2, 2022 at 3:30 am |
Greg Jensen (BRIDGEWATER) on the Risks He’s Seeing in the Current Macro Environment
https://www.bridgewater.com/in-the-news/greg-jensen-on-the-risks-hes-seeing-in-the-current-environment
October 2, 2022 at 1:30 pm |
Good show…
@ 12:25 — “The liquidity post-covid got stuck in the US, so much money was printed, and it didn’t go all over the world the way it did post GFC. But the US is the center of the bubble and it is the most at-risk of the pulling of liquidity that’s happening now at an increasing pace, and just as the liquidity creation of the fed pushed assets up much faster than the cash flows in the real economy, the liquidity reduction is pulling the money from the assets that need liquidity. Any asset that doesn’t generate its own cash flow to support its ability to go up requires new liquidity, take the most extreme example like crypto currencies that don’t create any income stream, it requires new liquidity in order to get a new buyer, and similarly in some stocks, like 40% of the US stock market, without new liquidity their prices fall”.
So there it is – print or die. I think they’ll print. World history for millennia suggests so, it’s just question of WHEN. So watch the technicals… Remember in summer during the dead-end bounce in stocks with a corresponding drop in USD, when I posted that the dollar looked potentially vulnerable to having made a double-top but the technicals didn’t yet confirmed a top, and Yra chimed in with the same belief per his technical guru. Point is, technicals work to help guide us about “when” the tide has probably changed (still NOT yet per mine). But IMO currently we’re nearing an inflection point again for US stocks about whether they’ve completed their ATH’s for years or if they’ve one last big rally to decisive ATH’s first. Either way, US stocks should eventually begin a poor decade (or two), technically. BICBW.
Gold & miners should eventually start to surge and outperform on a multiyear basis. And who the heck wants to hold bonds in a global sovereign debt crisis whilst governments must ease despite inflation to prevent a collapse (as the BOE did last week). But that’s where we are now in most countries.
Jensen didn’t speak about Europe, which I think is most likely the leading candidate for a financial crisis. Because I think the US finally killed the NS pipeline as they’d long wanted and it probably pushes Germany and Europe over the edge, so probably can short europe against almost anywhere.
But Jensen seemed to think, as quoted above, that the US is the most financially vulnerable. However that was recorded before September’s explosive event that forcefully removed the possibility of Germany taking an exit ramp from an energy-induced industrial collapse, so we’ll see who fares worse & better now.
October 2, 2022 at 1:53 pm |
So I had to find this again. An hour-plus with Stanley Druckenmiller about his life, experiences, philosophies, broad advice for investors, and ofc some current economic & market views from this summer (so far, so good). One of his good interviews. Even my wife enjoyed the (non-market) parts when I asked her to watch.
October 3, 2022 at 4:35 pm
David—and you are still married?This is a great piece thanks.Your comments are so full of brilliance they have been a great addition for over 12 years—-thanks so much
October 10, 2022 at 4:02 pm |
C’mon Yra you gotta say something about Bernanke winning the Nobel Prize…
October 10, 2022 at 5:55 pm |
Lol, that’s a “like” (unfortunately I can’t do likes here)
October 13, 2022 at 7:53 am |
Also, about Ben’s vice Janet Yellen:
June 27 2017: “I don’t see another financial crisis occuring in our lifetimes.”
Sept 27 2022: “I don’t see any erratic financial market conditions.”
Sept 27 2023: Sometime after a ~50% drawdown in most equities AND bonds, “I wish to express my deepest appreciation for my Nobel Prize in Economics.”
October 14, 2022 at 9:29 am |
Good talk with Anas Alhajji. You can’t talk energy markets anymore without talking geopolitics.
Rather monumentous and biting what Saudi and OPEC+ did to the Bidens a week ago, and also the UAE in St Petersburg with Putin two days ago. All the oil & gas producing nations of the Persian Gulf have or are joining the BRIICSS+ alliance. Nuff said.
Energy is the master currency today as “peak cheap energy” has passed. Looking forward, this will profoundly impact global macro and markets. Zoltan Pozsar is on point even if he’s a bit early. Things don’t go in a straight line, ofc.
For future considerations in energy, research what & who leads in thorium-fueled nuclear reactors, critical EV metals, electric powered vehicles/trucks/buses & hispeed rail, and lithium & silicon batteries (hint: they’re not G7 nations).
The sun rises in the East.
October 14, 2022 at 9:30 am |
Minus 52… You gotta go back almost 42 years to find the 2Y this inverted over the 10Y https://stockcharts.com/h-sc/ui?s=$YC2YR