At the end of last month, the Brookings Institute hosted a conversationwhere one of their most distinguished current scholars introduced and interviewed one of their newest. The former was former Federal Reserve Chairman Ben Bernanke welcoming the latter, former Federal Reserve Chairman Janet Yellen. Listening to them talk was a total delight (thanks T. Tatteo for that), particularly for all the obvious things they almost certainly skipped over intentionally.
If you have the time, it’s worth it in the same way as it is to read through the 2008 FOMC transcripts. Should anyone really need to be convinced they really have no idea what they are doing, this is a pretty good opportunity. It’s one thing to hear about deep economic theory for what hasn’t happened yet; quite another knowing what did happen and how these two people more than any others in the world were supposed to have prevented it.
The short intro piece in this week’s edition of The IKN Weekly, IKN461*:
Jerome does an FOMC
“I don’t care what the newspapers say about me as long as they spell my name right.” –Phineas Taylor Barnum
There are things we know and things yet to discover about the FOMC meeting this week:
We know Jerome Powell sits at the top of the table for the first time.
We know that a rate hike is going to happen. Put another way, if rates aren’t hiked a notch the market will be very surprised and the market doesn’t like surprises at the best of times, let alone from a Fed with a brand new chair.
We are yet to discover how Fed Head Powell handles the presser post-FOMC, but considering his polished performance in front of Congress a couple of weeks ago, a few pesky journalists are unlikely to ruffle his feathers.
But most important of all next week, we are yet to discover the tone and content of the FOMC communiqué, that publication of always close focus will be pored over, examined and debated more intensely than ever as the market tries to interpret the direction Powell will (or at least want to) take.
Anyway, Wednesday’s your day. We’ll see how “King Dollar” looks afterwards (thank you Kudlow) and by definition, gold.
Talking of which, I’m hoping that President Trump’s new (latest?) economic advisor Larry Kudlow continues the gold trash talk and more of his “I would buy King Dollar and I would sell gold” comments are highly welcomed by these pages. Less because Kudlow is a time-tested contrary indicator and more because the average financial professional and market participant, beyond casual mockery of we tinfoil hat wearers, simply doesn’t think about gold very much. Therefore, if the guy whispering in the ear of Trump is talking gold it doesn’t even matter that his comments are negative, it’s going to get more people to at least consider gold’s position in the investment firmament. We are in the political era that PT Barnum could only dream about, after all.
*Yes, that does mean I’ve spent the last 461 weekends writing the thing.
It’s 819 days since the start of the Fed tightening cycle. Why would I know that so precisely? Because I just finished creating a chart of the stock market performance before and after the first fed tightening.
Indexing the stock market performance around certain events like the first Fed hike is not novel. Tons of market strategists create these sorts of visuals. But Ned Davis created a chart I found so fascinating – what’s that line about good and great artists? Well, I am stealing it.
Actually, I just wanted to see it updated, so I thought it was worth recreating from scratch, but all the credit goes to Ned.
As I mentioned, in a lot of ways it’s just a regular piece of research. The truly insightful part of Ned’s chart was to divide the tightening cycles into slow and fast campaigns. For example, when the Fed began hiking in April of 1955, they raised rates at a gradual, slow pace. This was in contrast to November of 1967 when the Federal Reserve raised rates quickly.
Well, everyone wants to talk about rates these days and it’s no mystery why.
The Fed is under new leadership at a pivotal juncture. Balance sheet rundown has commenced and the Trump administration has embarked on what multiple sellside desks (see here, here, and here for a few takes) have described as an ill-advised quest to try and supercharge an already hot economy with late-cycle expansionary fiscal policy.
And so, the supply/demand dynamic in the Treasury market has shifted. Financing the tax cuts and increased spending means more supply and with the Fed out of the market, it’s left to price sensitive private investors to provide the bid. This comes as the global reserve diversification debate heats up and as second-order effects of increased bill supply could further sap foreign demand for U.S. debt (see here). To be sure, the market will clear – the question is, at what price?
That gets to the heart of the debate about where yields go from here and the concern is that between everything said above and the suspicion that between fiscal stimulus and now tariffs, price pressures could build quickly, the Fed will be forced to take a hawkish turn that’s not yet priced in by markets. All of these concerns helped fuel the bond rout that conspired with the February 5 vol. shock to send global equities careening into correction territory last month.
Well, one person you might be interested in hearing from on all of this is Jim Grant, and happily, Erik Townsend welcomed him to the MacroVoices podcast this week.
You can listen to the interview in full below, but here are a couple of excerpts that touch on the questions everyone wants answered.
There’s no shortage of event risk in the week ahead. This is not going to be for the faint of heart.
Chief among concerns is of course Trump’s trade war, pre-announced last Thursday, much to the surprise and chagrin of damn near everyone, including investors.
The decision on steel and aluminum tariffs rattled markets and although some Trump surrogates have suggested it shouldn’t come as a surprise given Wilbur Ross’s recommendation and, perhaps more to the point, candidate Trump’s promise to try and restore lost “greatness” by propping up dying industries, everyone was assuming that rationality (or some semblance thereof) would ultimately prevail.
While some analysts are still holding out hope that the rhetoric will turn more conciliatory going forward, Peter Navarro didn’t exactly inspire much confidence on Sunday. Make sure and stay tuned to Trump’s Twitter feed or maybe Fox & Friends for the latest updates on this because if we learned anything on Thursday, it’s that unless you’ve got a direct line to Wilbur Ross (which I guess would mean having two Campbell’s Soup cans joined together with a string), the first people to know what the next step is are Fox anchors and Donald Trump (in that order).
The dollar managed to eke out a gain last week and it will obviously be in focus again as it’s being pulled between the twin deficit boondoggle and the administration’s weak dollar by proxy policy on one hand, and higher rates/a more hawkish Fed on the other.
We were having a perfectly nice low-volatility uptrend until Jan. 26, and everyone was happy. Since then, the inverse VIX ETN known as XIV has blown up (a great case of a “burning LOH” marker), and traders are starting to remember that stock prices actually can go down. So why now?
As with most bear markets and recessions, the blame goes to the Federal Reserve, which decided last year that it would start unwinding all of the QE buying of T-Bonds and Mortgage Backed Securities (MBS) that it had bought up from 2009-14. Last year, the Federal Reserve under Janet Yellen announced plans to start liquidating those bond and MBS holdings, starting at a rate of $10 billion per month in Q4 of 2017, and ramping up that rate by an additional $10 billion in every quarter to follow. So the target rate of sales for Q1 2018 is $20 billion per month, and it is supposed to ramp up to $30 billion per month in Q2, then $40 billion per month in Q3, eventually peaking at a $50 billion per month rate in Q4 and beyond.
Personally, I believe that the plodding, implacable Robert Mueller, white knight of the Deep State, will flush the Golden Golem of Greatness out of office, probably on some sort of money-laundering rap having nothing to do with “Russian meddling.” Anderson Cooper will have a multiple orgasm. Rachel Maddow will don a yellow hard-hat and chain-saw a scale model of Mar-a-Lago to the glee of her worshippers. The #Resistance will dance in the streets. And then what?
I doubt that Mr. Trump will go gracefully. Rather he’ll dig in and fight even if it means fomenting a constitutional crisis. He’ll challenge Mr. Mueller on veering into matters unrelated to alleged Russian pranks in the 2016 election. He may well attempt the self-pardoning gambit. He will have a lot of support out in the Deplorable gloaming. But, at some point, I expect a bipartisan consensus to emerge in congress that the guy has got to go. He’s making it impossible to conduct even the routines of bribery and domestic collusion that Washington exists for. Nobody is getting paid — at least not the bonuses they’re accustomed to seeing.
Yes, The Fed’s version of Rigor Mortis (aka, Fed-or Mortis) is setting in.
Mortgage applications increased 2.7 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending February 23, 2018. This week’s results include an adjustment for the Washington’s Birthday (Presidents’ Day) holiday.
The seasonally adjusted Purchase Index increased 6 percent from one week earlier. The unadjusted Purchase Index decreased 1 percent compared with the previous week and was 3 percent higher than the same week one year ago. The Refinance Index decreased 11 percent from the previous week.
Ok, so we got through the first of two Powell testimonies, and it went ok, all things considered. The message was mildly hawkish on balance and the result for yields, the dollar and secondarily, for stocks, was predictable.
The comments that set the tone came early on when Powell suggested that his outlook on the economy had improved of late and although he said he “wouldn’t want to prejudge” anything about the rate path, he noted that for him, the data “add some confidence to the view that inflation is movingup to target.”
“We’ve also seen continued strength around the globe, and we’ve seen fiscal policy become more stimulative,” he added.
Treasurys dropped on those comments as 10Y yields quickly moved above 2.90.
Zooming in on 2Y yields just as the comments excerpted above hit, you can really see the impact:
Divergent: It’s Dalio (And Asness) Versus Everyone Else as Money Flows to Europe Stocks (Fed Tightening As ECB Maintains Accommodating?)
Money is following to European stocks as jitters struck the US stock markets and The Federal Reserve continues to slowly normalize its monetary policy.
(Bloomberg) — Billionaire Ray Dalio has $18.45 billion in bets against Europe’s biggest stocks. Most of the rest of the investing world is headed in the other direction.
U.S. stocks lost $9.7 billion in investment so far this month while Eurozone shares have gained $3.2 billion, according to data compiled by Bloomberg. Peers of Dalio’s firm, Bridgewater Associates, are mostly wagering that Eurozone equities will rise.
“I’m surprised. That’s a big bet. Dalio and his team are very confident,” said Rick Herman, managing director of asset allocation who helps oversee about $30 billion at BB&T Institutional Investment Advisors Inc. “That’s definitely out of consensus. European stocks are cheaper, and they also have stronger earnings growth.”
Dalio has always marched to the beat of his own drummer, so his big short position, especially when other hedge funds are betting in the opposite direction, could be seen in that context.