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.