Global Macro Monitor

Trump’s relentless pounding of the Fed for not pumping the stock market is concerning if not downright scary.  Makes us think he is envious of the YTD  500 plus percent return of the Caracas Stock Market Index (IBVC) and wants Powell to beat it.  Winning is everything even though winning may result in nothing.

More seriously,  the Fed’s independence and credibility are slowly being chipped away by the White House, which is probably setting up the Fed to take the fall for the next crisis or economic downturn. We raised these concerns last July.

Quantitative Tightening had almost no impact on monetary policy, i.e., the Fed directly reducing reserves and tightening credit, but has forced the Treasury to increase the size of its monthly note and bond auctions by $300 billion (plus/minus) annually.  Coupled with skyrocketing deficits, the Treasury has been floating an unprecedented  $1-1.5 trillion annualized of new marketable securities during an expansion.  As a consequence, long-term rates spiked in September and stocks collapsed.

It doesn’t take a Ph.D. to figure out the Treasury is now starting to crowd out markets and longer-term rates can only stay low if funding is significantly augmented with haven flows. The removal of QT will help by taking $300 billion of Treasury annual supply out of the monthly auctions.

Moreover, the debt ceiling will force Treasury, among other means, to fund itself running down its checking account at the Fed rather than increasing its outstanding debt further easing new supply and relieving pressure on long-term rates.

This is only temporary, however, and there will be a “trampoline effect” or a new supply shock once the debt ceiling debate is resolved.  But, probably not before an ugly political fight.  Stay tuned.

The video is a compilation of tonight’s sweet dreams of those at the top of the Leaderboard at Augusta.

Check this out.

The Greek 5-year now trading through the U.S. 5-year yield.   Absurd.

Italian 10-years now through the U.S., Portugal 10-year is trading 140 bps through the U.S.?   WTF?

We laugh when the Flat Earth Yield Curve Society asks, “what are the bond markets telling us?”

Nuttin’, honey.

Global bond markets are distorted and suffer sovereign yield scarcity due to global central banks becoming the largest buyers.   Foreign central banks and the Federal Reserve now own/hold almost 50 percent of the outstanding U.S. marketable notes and bonds.   This is the “quantum mechanics” of the new bond market, folks.   The underlying reality of markets are not the same as we used to understand them.

All Markets Are Distorted – Beware Of Reflexivity

If the risk-free interest rate is distorted, then all assets are mispriced.

Moreover, given the increasing feedback between markets and the economy, it is not inconceivable the Flat Earth Yield Curve Society fails to discount the distortions and convinces itself and the real economy the yield curve is signaling an imminent recession.  Capital investment and consumers then run for cover and it’s game on — a self-fulfilling recession.  Soros’ Reflexivity on steroids.

Of course, a recession is going to come someday but who knows when, and we sure wouldn’t trust the distorted bond market to tell us anything about anything.

Don’t make the mistake that one prominent market strategist made when central banks were scooping up sovereigns faster than my 12-year daughter used to do with ice cream at 31 Flavors,

We’re in a depression. That is what the bond market is telling us.  – GMM, September 2010

Someday this will end ugly.

Interesting take on Brexit from the people that matter.

The main reason why Parliament is having such a tough go at Brexit is that many Brits have changed their positions and would now reverse their vote from leave to remain. Exactly why it is inevitable a now much more informed electorate will push the Parliament to introduce a second referendum.  Make sure to listen to the full video.

We believe cable will move to at least 1.35 on the announcement, or hint thereof a second referendum, the Brexiteers then take to the streets with the political instability increasing volatility (the bad kind) in the pound, before the move to 1.45ish on an overwhelming remain victory.

Hit Tip:  El-Elrian

We have always been critical of how the government measures inflation and are flabbergasted by this constant fear and loathing of the talking heads the economy is in or on the brink of deflation,

If Mohamed purchased those bananas at Trader Joe’s —  the famous $.19 bananas — it is a classic example of shrinkflation, which is hard to calculate as the “same for less”
is a bit more complicated to measure and easier to hide a price hike than as “more for the same.”

Relative Prices Versus Inflation 

Moreover, some, including possibly the next Fed governor, can’t seem to distinguish the difference from a change in relative prices to a rise in the general price index, or what is defined as inflation.  We concede the above banana example is a hypothetical but we honestly believe true inflation, that is actual prices paid for the same amount of goods or services, unadjusted for “quality” or no hedonic tricks, is higher and more ubiquitous than reported.   Yes, some gym memberships are cheaper but rent for the average Jane and Joe consumer continues to rise at a fairly rapid clip.

Rampell Learns Moore

Watch how Washington Post reporter Catherine Rampell owns Stephen Moore, who was recently nominated for the Fed board,  2 minutes into the video.  Moore, wrongly or falsely claims the economy is in deflation and appears to say the Fed rate hike in December is causing soybean prices to fall?   Are you freaking kidding me?

Rampell is spot on that soybean, and many other farm prices including wheat, are falling and weak because of Trump’s trade wars.   The Fed driving down soybeans?  What a joke!

Nasty Business — Politics Ain’t Beanbag

We don’t hold back on our view that Moore is unqualified for the Fed, is a complete economic ignoramus, or in Irish, and total Idjit.  Nothing personal to Moore and all is directed at his professional qualifications but it must be argued in the context of the bloodsport of a political cage fight.  A very nasty place to do business, indeed.

We were some of the first to raise the flag on Moore.  Here’s more on Moore, here and here and here.

The reason for our nastiness is that the stakes are so high.

Dollar At Stake

We are not in Kansas anymore, Toto, and Fed appointments are so much more than just appointing the local dog catcher.

We believe the reserve status of the U.S. dollar is at stake and the credibility of U.S. policy is slowly being chipped away,  which will determine the difference between the next QE driving asset prices higher or turning the U.S. into Venezuela.