Notes From Underground: Meet the Dwarves of Dovishness

Every day my inbox is filled with tweets and stories about which FOMC member said what. It’s been less than a year since the Fed ended quantitative easing and merely eight months since it started unwinding its balance sheet. The Powell-led Fed kept pumping liquidity into the system, even as they started raising rates, which reflects how little confidence policymakers had in their own models.

And now the media lavishes praise on Neel Kashkari, John Williams, Lael Brainard, Susan Collins, Mary Daly, Rafael Bostic and others as if they were great forecasters by continually bombarding the financial pages with the need to have a “terminal rate” somewhere around 5.5%, prompting others to race ahead with calls for 6% or, as we heard from one pundit last week, 8%.

It is time for the Fed to slow their roll and engage in humility for the true FED policy of ZERO rates is the measure of just how far off FOMC forecasts have been, dating back to Alan Greenspan. Most importantly, former Fed Chair Ben Bernanke, the progenitor of forward guidance and QE, proclaimed that the SUBPRIME CRISIS was contained just prior to it devolving into the GLOBAL FINANCIAL CRISIS. When Jerome Powell is on target it serves as a reminder to WALL STREET what a poor forecaster the central bank actually is when moving to a much more pragmatic policy.

If you didn’t watch the Powell’s discussion with David Rubenstein last week I would advise doing so as it showed the Fed chair at his best. The most critical part of the interview was when Rubenstein got Powell to walk back his disinflation view that was deemed dovish at the post-FOMC press conference the week before. Many analysts believed Powell would walk back disinflationary rhetoric following the huge jobs number on Feb. 3. Powell didn’t walk it back and seems to be leaning toward slowing the FED in an effort to assess the impact of a year’s rapid increase in interest rates coupled with an effort at quantitative tightening.

Powell has to be careful for in this AGE OF ENORMOUS DEBT there can be no inner VOLCKER. There was an article in the Wall Street Journal Friday by Andrew Duehren titled, “Fed’s Inflation Fight Pushes Up Cost of U.S. Debt.” For several months we at NOTES FROM UNDERGROUND have warned that the politics of percentages was going to come into play as the cost of financing the massive debt piled up by Trump’s ill-conceived tax cuts and Biden’s profligacy was came to be paid. Duehren wrote: “The Treasury’s spending on interest on the debt is up 41% to $198 billion in the first four months of this fiscal year with $140 billion in the same period last year.” The story went on to use the CBO projections about how much the costs of financing the massive deficit will, but the CBO projections were based on INTEREST RATES BEING 1.9% by end of 2022 and 2.6% at the end of 2023.

However, please take this story with a grain of salt because the Congressional Budget Office will release its updated outlook on Wednesday, Feb. 15, which should account for the rise in interest rates.

The key issue for the entire global financial system is how can the price of sovereign debt be able to absorb the blows from inflation at 5% with a massive increase in the cost of financing the debt as central banks seek to remain HIGHER FOR LONGER. Who is buying all the US long-term debt at 3.6%?

***It is also of paramount importance to note that the ECB, BOJ, SNB, BOE, BOC, RBA, RBNZ, as well as many emerging market central banks are striving to raise rates in an effort to keep their currency stable. The ECB will raise rates more aggressively than most as President Lagarde is under extreme pressure from the HAWKS .

Following the Feb. 2 meeting, the hawks were filling the media with calls for faster rate hikes. Lagarde has already committed to a half a percentage point increase at the March meeting in an effort to keep the hawks in place. QT is a dangerous tool for the ECB because it will certainly lead to FRAGMENTATION of the European bond markets, which more concerning for Brussels. If the ECB violates its Lisbon Treaty rules to prevent fragmentation then the anti-EU voices in Germany will be back at the German Constitutional Court creating potential problems for an already besieged Olaf Scholz.

If this is not enough to concern markets we now have rumors that Ueda Kazuo will be the new Governor of the Bank of Japan. This has not been ascertained but is on the boil and I suggest you read the insightful piece by Tobias Harris at Observing Japan on this appointment. It is important to note that Ueda is an MIT PHD in the same group as Bernanke and many other central bankers and I would further advise looking at the members of G-30 to understand why Ueda would be a comfortable fit. But if Japan begins to alter its YCC policy further bond markets will suffer further stress because of the gigantic impact of Japanese banks, pension funds and insurance companies on global financial flows.

Again, many piles of tinder set to ignite on the global financial situation.

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7 Responses to “Notes From Underground: Meet the Dwarves of Dovishness”

  1. tom Says:

    just in time…..hmmm

    …In his day job, Dr. Narita conducts technical research of computerized algorithms used in education and health care policy.

    Last month, several commenters discovered Dr. Narita’s most incendiary remarks and began spreading them on social media. During a panel discussion on a respected internet talk show with scholars and journalists, Yuki Honda, a University of Tokyo sociologist, described his comments as “hatred toward the vulnerable.”

    A growing group of critics warn that Dr. Narita’s popularity could unduly sway public policy and social norms. Given Japan’s low birthrate and the highest public debt in the developed world, policymakers increasingly worry about how to fund Japan’s expanding pension obligations. The country is also grappling with growing numbers of older people who suffer from dementia or die alone.

  2. ShockedToFind Gambling Says:

    Good article…..I am more than a little concerned about the market reaction to the 30 Year Treasury Auction. If the Treasury starts to have trouble rolling over its debt, we’re in for a World Crisis.

    • David Richards Says:

      Yes, given the worsening sovereign debt crisis in the US (and others), a US Treasury debt debacle looks like a real possibility this year.

      As job #1 for the Fed (and Treasury) is to feign US govt solvency and keep the government running, it’s likely that when treasury debt can’t be rolled due to a supply-demand imbalance, the Fed will step in to buy the debt. Otherwise, interest rates will have to soar to attract enough buyers, which paradoxically would materially worsen the budget deficit and exacerbate the soverign debt crisis – rinse & repeat. So instead, the release valve is likely to be let the dollar tumble and monetize the debt.

      The dollar has already tumbled, for example to a 9-year low where I am. But aside from a corrective bounce higher, I expect an even weaker dollar is still in the cards this year. The alternative will be like the first ten months of last year: US interest rates up, dollar up, everything else down. That could precipitate as you said, “a world crisis”, given that interest rates are already painful for many because there simply exists too much debt in the world today.

  3. the american limey Says:

    EXCELLENT TROTSKY as ever! Thanks for the heads up on 2/15/23 completely missed that one. Swmbo has stopped all trading until after that 🙂

    by a quirk of fate I was chatting with some mates in the big smoke ( london) . They sent me this. I think it’s from the FX desk of UBS.

    “Ueda is actually an academic economist. Anyone who has studied Japan academically will be aware of him… He’s a little bit of a supply-sider. But he’s also been not terribly positive on Abenomics from the start. From about 2016 he was saying that it had basically failed and the super large monetary easing was causing problems with the bond market, and these sorts of things.”

    “It’s quite a surprise in terms of the way that the candidates have have lined up. I don’t think it will keep anyone happy in the market. They’re all completely qualified in and of themselves, but it’s a strange mix…I’m surprised that dollar yen is not 129 already. Maybe that’s just a result of people not knowing who these characters are. To me, this is as hawkish an outcome as having Mr. Yamaguchi in the governor role.”

  4. Stanley Womack Says:

    I agree largely with your message. The one component not discussed (intentionally or other) by the Fed, Whitehouse and pundits is that world currencies in past years have relied on a “carry trade”, by borrowing a low interest currency (eg. dollar) to fund purchase of a higher interest rate bond. Presently, US bonds, UK gilts, and JPN bonds have gone no bid, even by their own centis. In the past, sovereign funds or fund of funds would step in and buy them up as a matter of practice. It has been some time since we’ve had UK and particularly US bonds go no bid on date of issuance.

    There is an explanation that few care to investigate (media) or entertain. The idea that the Federal Reserve via its “FIMA” outlet and RRPs, can lend foreign centis, including PBOC, if they use the major equity indices to carry. Avoiding the technical machinations, the overriding authority of a carry trade is to provide a consistent yield during the hold period of the carry. And this practice presently is at play to pillory global currencies. This can be widely seen on a chart using the currency futures versus the pairs using the $dxy and $spx. To wit, a crash will come as a “carry crash” and nothing else as many are trying to game. Large carry trades rarely crash and that will be the only “black swan” event to do so at present imo.

    Why? Large carry trades are based on debt held by sovereigns. And if the Fed guides its book at the window, the Fed is telling its customers they must use equities to keep the currencies of global economy afloat. Why FIMA facility? Because the Fed is prohibited from loan a country the US is at trade war with money. But because Yellen needs China to hold those bonds and not sell while she spends, FIMA is that loophole.

    Thus, war with China is either fictional narratives or a new form of economic theatre for the sake of commerce. Also, we’ve been in a 400 handle range in the spoos since October and with balanced waves (no extreme highs or lows). But because this is a carry trade, it is tenable only if it continues growing, which means the Fed’s balance sheet will continue growing but the question becomes – “what are they booking this carry debt to”? Further, who is responsible for paying it down?

    This “carry trade” is no longer based on circular dollar flows. All of this Fed dancing does seem to coincide with China’s launch of their version of a Fed/IMF/World bank paradigm. All under the “silk road initiative”. The website – check out who the members are.

    • Yra Says:

      Stanley–very concise and intricate response –much todigest as as you post below FED GUY and i did a podcast this week—Joseph is bullish the Dollar but predicated on certain outcomes which I am not there yet .The FED will in my opinion not allowdeflationary forces to set in for the massive debt pile which is building would become insurmountable in such an outcome–hence the Bernanke doctrine supersedes the Volcker doctrine—I am sticking to this trading view until shown differently.But I aprrecitae your analysis of the carry trade and equities as your point is similar to the BOJ QQE program

  5. Stanley Womack Says:

    This guy has a decent primer w/o having to read a dozen whitepapers.

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