Posts Tagged ‘QT’

Notes From Underground: Meet the Dwarves of Dovishness

February 12, 2023

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.

Notes From Underground: Cui Bono? (Who Stands to Gain?)

November 28, 2022

When it comes to making sense of the global financial system I always have to ask the question who is benefitting from monetary policy? The recent podcasts from the Financial Repression Authority has provided a good backdrop to understanding the importance of debt markets — and by default the significance of the US DOLLAR as the bulwark of the financial system. The mobility of money or what serves the process of globalization has revealed many of the fragilities of the DOLLAR as a funding vehicle because of the FEDERAL RESERVE’S policies, which allowed all the other world’s central banks to sustain a prolonged period of zero and even NEGATIVE NOMINAL RATES.

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Notes From Underground: Recapping the Last Two Weeks

November 20, 2022

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.

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Notes From Underground: Another Day, Another Podcast

September 14, 2022

It was a fortuitous day that Richard Bonugli arranged a podcast with Joseph Wang, author of the Fed Guy and an former employee of the New York Fed’s System Open Market Account (SOMA). The podcast was recorded 90 minutes after the release of Tuesday’s CPI data so there was much to discuss in real time about FED policy, the recent moves in the SPOOs, dollar, commodities and precious metals were all reversed because the MARKETS seemed to have been caught off guard by a much higher number than Wall Street pundits anticipated.

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Notes From Underground: Dear Jerome

August 24, 2022

I have not been a fan of yours since your January 2019 “Powell Pivot,” when you allowed yourself to be fooled by the markets. In an effort to rein in Ben Bernanke and Janet Yellen’s QE programs you went for what Stan Druckenmiller¬† called the “double shotgun approach” and raised interest rates while reducing the Fed’s balance sheet — what Peter Boockvar called Quantitative Tightening (QT).

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Notes From Underground: Neutral

August 16, 2022

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. 

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Notes From Underground: Discussing Europe With Dr. Barbara Kolm

May 10, 2022

Last week the FOMC raised rates by 50 basis points, which seemed like the most likely outcome (although interest rate markets had assigned a slight probability of 75 basis point increase). The statement was nothing if not vague about the FED‘s plans, yet the last sentence left the central bank room for flexibility: “The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”

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Notes From Underground: A European Discussion With Professor Polleit

May 3, 2022

Yes, Wednesday is FED day and the markets are expecting a 50 basis point increase in the FED FUNDS RATE to a range of 0.75% to 1%. The most important issue will be the size of the balance sheet unwind and whether Chair Jerome Powell is good to his heightened concerns about headline inflation means a full throttle on balance sheet shrinkage, reaching the full $95 billion a month at a quick pace. So Jerome, let’s have at it and let the markets decide the impact on myriad asset classes. In 2018, this double shotgun of QT and interest rate hikes proved too much for the highly leveraged global markets. Now that the Fed’s balance sheet is twice as large let’s see how it will affect the leverage in the global system.

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Notes From Underground: Time to Escalate and Deescalate the Fed and Putin?

April 10, 2022

There was an article in Foreign Affairs this week by Graham Allison, the dean of American political scientists, titled, “Putin’s Doomsday Threat: How to Prevent a Repeat of the Cuban Missile Crisis in Ukraine.” The piece raises an important tactical question about escalating the violence in an effort to prevent a greater catastrophe similar to what President Kennedy was threatening in 1962. It’s worth a read as it was Allison’s book, “The Essence of Decision,” that provided the understanding of the bureaucratic mindset during the nuclear age. It provoked me to think that the escalate to de-escalate seems to be the paradigm of the FOMC as complacency over zero interest and transitory inflation has given rise to policy makers’ more hawkish jawboning. Uber-doves Charlie Evans, Mary Daly, Jerome Powell, Lael Brainard have been on a mission to find their INNER VOLCKER (at least rhetorically).

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Notes From Underground: Is It George Bailey or Henry Potter?

February 16, 2022

Bank of England Governor Andrew Bailey made a ridiculous comment almost two weeks ago and I’d be remiss not to mention it. Bailey issued his own FORWARD GUIDANCE on how to slow the pace of inflation. He suggested that people refrain from seeking big pay raises. It’s astounding that a sitting member of the G-7 Finance Group has the temerity to restrain the AVERAGE WORKER while promoting QE policies that have stoked a serious rise in asset prices for those who own antique autos, stocks, precious metals, art, multiple homes and any other asset class on the planet.

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