Notes From Underground: Recapping the Last Two Weeks

The day after the FED meeting I sat down with the FINANCIAL REPRESSION AUTHORITY and did a podcast with David Rosenberg and Peter Boockvar. The discussion is still relevant as it speaks a great deal about bond, equity and, in particular, currency valuations. Then on Monday, November 7 Richard Bonugli hosted an hourlong discussion with Brent Johnson and myself, which was also about currency valuations and the precarious global situation of massive debt overhang. Finally, I recorded a third podcast with FRA and Eric Peters about crypto and the possible fallout from the collapse of FTX. There’s lots to digest here but as always I remind readers that the only relevance for traders/investors is to find meaningful trades or investments. Otherwise we are just talking to hear ourselves talk, which is in the very real sense meaningless. Also, it is not always what you make through relevant ideas but the capital preserved by not following the herd.

Click to listen to the Nov. 4 podcast with David Rosenberg and Peter Boockvar.

Click to listen to the Nov. 7 podcast with Brent Johnson.

Click to listen to the latest podcast with Eric Peters.

During the podcasts and many times in NOTES I have raised the issue of the dangers of dollar strength. There are those who maintain that a strong dollar will help curtail US inflation but from my perspective ONLY IF THE GLOBAL ECONOMY IS BROUGHT TO A SEVERE RECESSION as it will force a disinflation when global firms dump goods on the world market. The world has experienced something new over the last few years. That is the dollar as a global funding tool when the FED held rates at zero while embarking on another massive round of QE. The danger has been that the FED enabled a massive buildup of dollar debt. That created massive dollar-based liabilities, which is why so many emerging market central banks have had to preempt the US central bank by racing ahead with interest-rate increases. Augusten Carstens, the head of the Bank For International Settlements, noted this back at his appearance in Sintra, Portugal when he shared a stage with Jerome Powell, Christine Lagarde and Andrew Bailey. It seems that US Treasury Secretary Janet Yellen has gotten some feedback from G-20 members worried about an overvalued dollar.
As I have warned, the world needs to be cognizant of the fallout from the Swiss National Bank pulling the PEG on the EUR/CHF back in January 2015, which wreaked havoc on Eastern European citizens with massive Swiss franc liabilities because of the FED and ultra-low interest rates. Since global central banks have been flooding the financial system with liquidity, we are in a new era that cannot be modeled. So it’s interesting that the talk continues of inflation waning but rates still react more to FED jawboning. The US 2/10 yield curve closed at its most inverted level in 40 years, even as the DOLLAR has corrected about 5% from its recent highs.
This is something to watch as the FED continues talking asset prices lower, especially the EQUITY markets. Yet stocks continue to defy Bullard/Kashkari. IF I RAN THE FED, RATE HIKES WOULD STOP AT 4% WHILE DOUBLING THE SIZE OF QT (removing $180 billion a month). The POWELL FED is on the verge of making the same mistake it made in 2018 with what Stanley Druckenmiller called the double-shotgun approach. The inverted curves are telling you Jerome: It’s time to rein in excess liquidity in an effort to bring prices down to the level of fed funds. Market signals are a valuable tool if the policy makers would heed them.

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9 Responses to “Notes From Underground: Recapping the Last Two Weeks”

  1. Asherz Says:

    Spot on. The answer is draining the system of excess liquidity by QT. QE caused outrageous malinvestment and its counterpart will correct that. Raising interest rates when global debt is over $300 Trillion, over three times global GDP, will destroy the world financial structure and economy. Powell cannot be Volcker because the big man was not dealing with the same balance sheet.
    Unfortunately, what I believe Powell will do when he eventually pivots (within the next six months), he will revert to the same drug, QE.
    Would that Central Banks leave the markets alone and had them let themselves self-correct.

  2. Adam R Kahn Says:

    Let’s hope for all of us that level heads win out and they don’t really drive the markets where it feels like they are going. Hope you’re doing well Yra – Adam Kahn (slm 152)

    • Yra Says:

      adam –yes doing well and let’s hope some level heads get to understand the role of the Dollar as a financial tool as its prime necessity—if you accept this premise then policymakers need to understand that a dual mandate is a faulty premise fitting the needs of the Nation-State even though its prime concern at the juncture of a slowing global economy is its critical role in global finance—again Volcker could not have been Volcker in the present state of global financial conditions—-interesting that Rogoff wrote a paper in 1985 warning that formal coordination of monetary policies could perversely ,lead to higher inflation[page 163 of B.Cohen International Political Economy

  3. Ulysses Grant (@LetUsHavePeace1) Says:

    Yra, as someone who looks at currencies through the lens of commodity trading, is right even when he is wrong. He kindly participates in discussions about what the central banks are doing and contributes his opinions about Powell, etc. But, his judgment has very little to do with FX. Does he want to own things that hurt your feet when you drop them as a short against the future price of the dollar or as a long against his hunch that smart businesses that make and do actual things will choose to (1) grow margins rather than (2) revenues? My bet is on door #1.

  4. ShockedToFindGambling Says:

    Yra, Nice article.

    You said “The inverted curves are telling you Jerome: It’s time to rein in excess liquidity in an effort to bring prices down to the level of fed funds.”

    No capiche…….bring down the prices of what?

    Wouldn’t reignining in liquidity invert the yield curve further (unless you runoff only medium to long term bonds)?

    • Yra Says:

      Shocked—traditionally yes reigning in liquidity would do that but these are not traditional times—if QT is enhanced then leverage in the system will begin to collapse and we just not know the consequences except that many asset classes would be more affected

    • Yra Says:

      shocked—there was an article in yesterday’s FT citing the comments by Robert Holzmann of the ECB and President of the Bank of Austria—-he notes it is not good for the European curve to invert–there really is no European curve but maybe German debt curve—because it harms banks ,therefore the ECB needs to concentrate on shrinking the balance sheet—my point is that;rate rises are doing very little as monetary policy thru rates is a slow /lag process.Raising the pace of QT will remove the excess liquidity quicker and it is time to test this with QT on its own and leave real fed funds rate negative and try to bring down prices through choking off the massive amounts of liquidity created by Powell and company

  5. pittrader1988 Says:

    would love your take on FTX…

  6. Richard H Papp Says:

    Yes Yra, rising rates “ain’t” doing it but substantial QT will involve decreasing the velocity of money in the system. This will involve eventually higher rates and lower level of bank and corporate liquidity and therefore growing instability and vulnerability in the whole financial structure.

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