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Powell Rate Cut Unleashes Volatility Tsunami

Powell Rate Cut Unleashes Volatility Tsunami

It wasn’t supposed to work this way.

In the rate cut playbook envisioned by Trump, Powell’s July 31st rate cut was supposed to send stocks higher while crushing the dollar. However, when the FOMC announce a “mid-cycle”, 25bps cut, the outcome was not only a surge in the dollar but also a surge in volatility not seen so far this year.

The sequence of events is familiar to all by now: at first, Powell’s rate cut spooked the market which had been expected either a 50bps cut, or an explicit promise of an easing cycle. It got neither, and neither did Trump, who the very next day realized that with the Fed now explicitly focusing on global uncertainties, read trade war, as a catalyst for future rate cuts as demonstrated by the following infamous chart

…. decided to escalate the trade war with China by announcing 10% tariffs on the remaining $300BN in Chinese imports, sending stocks and bond yields plunging, and the market pricing in as much as 100bps of more rate cuts in 12 months, forcing Powell to cut far more than just another 25bps or so as the Fed Chair suggested in the July FOMC meeting.

China immediately retaliated by devaluing the Yuan below 7.00 for the first time since 2008 and halting US ag imports, which in turn prompted the US Treasury to declare China a currency manipulator. Meanwhile, China’s yuan devaluation means the White House is set to unveil even higher tariffs, resulting in an even weaker yuan, and so on, in a toxic feedback loop that may soon escalate the trade and currency war into an all-out shooting war.

 …click on the above link to read the rest of the article…

3 Central Bank Shocks Unleash Overnight Yield Crash, With Yuan On Verge Of Collapse

3 Central Bank Shocks Unleash Overnight Yield Crash, With Yuan On Verge Of Collapse

There is just one way to describe the plunge in bond yields overnight and the events behind it: the global race to the currency bottom is rapidly accelerating in its final lap with a global deflationary Ice Age (take a bow Albert Edwards) waiting on the other side.

The main event, of course, was the latest yuan fixing with the PBOC showing a clear sense of humor when it set the currency at 6.9996laughably not to be confused with 7.0000 (for at least another 24 hours that is), but just a fraction of a percent away from the critical threshold, and weaker than the 6.9977 expected. The result was a resumption in the offshore yuan selloff, a hit to US equity futures and a drop in Treasury yields. Of course, once the PBOC does finally fix the yuan on the wrong side of 7, all bets are off and watch as the CNH crashes… as far as 7.70 according to SocGen, especially once Trump hikes tariffs to 25%.

But there was much more in today’s iteration of the global race to the currency bottom, when first New Zealand, then India and finally Thailand shocked investors by being far more dovish than analysts expected. Indeed, the three Asian central banks delivered surprise interest-rate decisions on Wednesday as central bankers not only took aggressive action to counter a worsening global economy, but are now frontrunning each other – and the Fed – in doing so.

As noted last night, New Zealand’s central bank on Wednesday stunned investors by dropping its benchmark rate by 50 basis points, double the expected reduction and sending the kiwi tumbling. Thailand also surprised all but two in a survey of economists, cutting by 25 basis points. Finally, India’s central bank lowered its rate by an unconventional 35 basis points.

 …click on the above link to read the rest of the article…

Can the Fed really Control the Economy?

Can the Fed really Control the Economy? 

QUESTION: This whirligig talk of whether the Fed cuts rates by 25 or 50 basis points is carnival-level absurdity. Does the Fed have the “pretense of knowledge,” as F.A. Hayek, said, that they can regulate the economy like turning up or down the thermostat? I know you don’t agree with this, Martin, but then, Wall St. trades on daily sentiment not ideology.

TM

ANSWER: I understand the theory, but where it is seriously flawed is the idea that people will borrow simply because you lower rates. More than 10 years of Quantitative Easing, which has failed, answers that question. The way the Fed was originally designed allowed it to stimulate the economy by purchasing corporate paper directly, which placed it in a better management position. Buying only government paper from banks who in turn hoard the money fails. As Larry Summers admitted, they have NEVER been able to predict a recession even once.

The Fed lowered rates during every recession to no avail just as the ECB has moved to negative rates without success. The central banks are trapped and they are quietly asking for help from the politicians which will never happen.

Nothing Is Guaranteed

Nothing Is Guaranteed

There are no guarantees, no matter how monumental the hubris and confidence.

The American lifestyle and economy depend on a vast number of implicit guarantees— systemic forms of entitlement that we implicitly feel are our birthright.

Chief among these implicit entitlements is the Federal Reserve can always “save the day”: the Fed has the tools to escape either an inflationary spiral or a deflationary collapse.

But there are no guarantees this is actually true. In either an inflationary spiral or deflationary collapse of self-reinforcing defaults, the Fed’s “save” would destroy the economy, which is now so fragile that any increase in interest rates (to rescue us from an inflationary spiral) would destroy our completely debt-dependent economy: were mortgage rates to climb back to historical averages, the housing bubble would immediately implode.Hello negative wealth effect, as every homeowner watches their temporary (and illusory) “wealth” dissipate before their eyes.

The Fed’s “fix” to deflationary defaults is equally destructive: bailing out too big to fail lenders will spark a political revolt that could topple the Fed itself, as the populace has finally connected the dots between the Fed bailing out the banks and financiers and the astounding rise in income and wealth inequality.

Other than the phantom “wealth” of real estate and stock bubbles, the vast majority of the ‘wealth” generated by the Fed’s actions of the past 20 years has flowed to the top 0.1%. This will become self-evident once the phantom gains of speculative bubbles vanish.

The Fed’s other “trick” to halt a deflationary collapse is negative interest rates, in effect taxing savers and those holding cash and rewarding those who borrow.Negative interest rates destroy every institution that depends on relatively low-risk interest income via bonds: pension funds, insurance companies, etc.

 …click on the above link to read the rest of the article…

4 Reasons To Expect Even More US-China Trade (And Currency) War Escalation

4 Reasons To Expect Even More US-China Trade (And Currency) War Escalation

As we noted earlier when summarizing some of the more notable Wall Street reactions to China’s jarring trade war escalation, we highlighted the take of Morgan Stanley’s chief US public policy strategist, Michael Zezas, who said that he saw incentives for the U.S. to escalate quickly. Specifically, referring to the now viral chart of the circular dynamic of Trump-Powell interaction…

… Zezas said that if the administration understands the Fed’s trade policy reaction function – which it clearly does after it unleashed a new round of tariffs less than 24 hours after the Fed’s rate cut which has the market now pricing 33% odds of 2 rate cuts in September (see more here) – then it may also perceive that a more rapid escalation could deliver one or more of three beneficial points ahead of the 2020 election:

  1. A quicker, potentially more aggressive Fed stimulus response that could help the economy heading into the election;
  2. More time to re-frame the potential economic downside; and
  3. A major concession by China (not our base case, but it is, of course, a possibility).”

“The dynamics of U.S.-China negotiation and macro conditions mean the next round of tariffs will likely be enacted, and investors are likely to behave as if further escalation will follow in 2019 until markets price in impacts,” Zezas wrote. “This supports our core view of weaker growth and skews the Fed dovish.”

Zezas also highlighted several key global trade risks amid the rising geopolitical uncertainty, which he expects to keep rising:

  • WTO Courts at risk
  • US/EU confrontation set to intensify
    • Nov 15th auto deadline
    • OECD negotiations
  • US/China resume escalation

 …click on the above link to read the rest of the article…

The Real Reason US Central Bankers Cannot Raise Interest Rates for the Rest of 2019

The Real Reason US Central Bankers Cannot Raise Interest Rates for the Rest of 2019

The real reason why the US Central Bank cannot raise interest rates can traced back to eight simple words – their response to the 2008 global financial crisis. US Central Bankers reached a crossroad of responsibility versus socialism for the über wealthy years before the 2008 financial crisis manifested, and they chose socialism for the über wealthy as could be expected, because Central Bankers have to somewhat appease the highest echelons of global wealth if they don’t want this class to turn their resources against them and argue for the dissolution of Central Banks. When Central Bankers, both in the US and in Europe, deliberately and very consciously chose the path of catering to the few thousands that constitute the class of the über wealthy over helping the remaining 6.8 billion people on planet Earth in 2008, they sealed the fate of what their decisions had to be some ten years later. 

During 2008, all of the largest European banks and US banks were completely bankrupt. To this day, I know that claim is disputed even though Finance Ministers that had privy to this data, like Greece’s Yanis Varoufakis, have made such claims. Furthermore, any reasonable person that looked more deeply into the financial health of all major US and European banks, the failure of which triggered the 2008 global financial crisis, would have understood that their unwillingness to operate as banks, but as massive hedge funds and to risk their clients’ deposits in hopes of making billions of profits every year, would have realized that regulatory agencies that suspended the necessity of banks marking their financial assets to market value  was enacted to allow banks to lie about their bankrupt status and project a robustness in financial health that simply did not exist.

 …click on the above link to read the rest of the article…

If The Federal Reserve Cuts Interest Rates Now, It Will Be An Admission That A Recession Is Coming

If The Federal Reserve Cuts Interest Rates Now, It Will Be An Admission That A Recession Is Coming

So there is a lot of buzz that the Federal Reserve is about to cut interest rates – and it might actually happen.  We’ll see.  But if it does happen, it will directly contradict the carefully crafted narrative about the economy that the Federal Reserve has been perpetuating all this time.  Fed Chair Jerome Powell has repeatedly insisted that the U.S. economy is in great shape even when there has been a tremendous amount of evidence indicating otherwise.  And of course President Trump has been repeatedly telling us that this is “the greatest economy in the history of our country”, but now he is loudly calling for the Federal Reserve to cut interest rates as well.  Something doesn’t seem to add up here.  If the U.S. economy really was “booming”, there is no way that the Fed should cut interest rates.  Right now interest rates are already low by historical standards, and theoretically it is during the “boom” times that interest rates should be normalized.  But if the U.S. economy is actually slowing down and heading into a recession, then a rate cut would make perfect sense.  And if that is the reality of what we are facing, then the economic optimists have been proven dead wrong, and people like me that have been warning of an economic slowdown have been proven right.

If the talking heads on television are correct, we’ll probably see a rate cut.  In fact, apparently there are some people that are even pushing “for a 50 basis point cut”

 …click on the above link to read the rest of the article…

Blain’s Morning Porridge – July 29th 2019

 Blain’s Morning Porridge  – July 29th 2019

“I’ve seen things you people wouldn’t believe. Attack ships on fire off the shoulder of Orion. I watched C-beams glitter in the dark near the Tannhäuser Gate. All those moments will be lost in time, like tears in rain. Time to die.”  

The UK is a curious place.  Boris Johnson’s feel-good drive and the numerous plots being arrayed against him, received rather less attention over the weekend than the Minister for the 18th Century’s rather ponderous style guide.  Jacob Rees-Mogg, Esquire, has banned a host of words, outlawed clichés, demands double spaces after full-stops, insisted on imperial measures (Kilometers, Kilos and grams are banned), and has made the incorrect use of apostrophes a capital offence.  Readers will know my grasp of punctuation, spelling and grammar is nebulous at best – so if I disappear suddenly you can assume the Extreme Grammar-Nazi wing of the Conservative Party has got me!

Back in the real world, this week is largely about tomorrow.  Worry not about what’s going on in Hong Kong, the Gulf, or even how bad European economic data might be.  The only real question is what will the US Federal Reserve do?  It’s not a question of will they ease rates, but by how much- 20% change they may go for 50 bp!  

Perhaps the question should be – why ease rates at all? 

It may be the depths of a thin summer, but a 25 bp cut will be enough to please the market.  The economy won’t change because of a quarter point reduction in ridiculously low rates, but stocks will rally and the market will be properly ecstatic!  Donald Trump will tweet to his followers about what a great job he’s doing and how its confirmed by the strength of the stock market.  That is a sh*t reason for cutting rates.  It worries me the Fed is prepared to pander to Trump and the stock market. 

 …click on the above link to read the rest of the article…

Are Central Banks Losing Their Big Bet?

Are Central Banks Losing Their Big Bet?

Following the 2008 global financial crisis, central banks bet that greater activism on the part of other policymakers would be their salvation, helping them to normalize their operations. But that activism never came, and central bankers are now facing a lose-lose proposition.

ZURICH – In recent years, central banks have made a large policy wager. They bet that the protracted use of unconventional and experimental measures would provide an effective bridge to more comprehensive measures that would generate high inclusive growth and minimize the risk of financial instability. But central banks have repeatedly had to double down, in the process becoming increasingly aware of the growing risks to their credibility, effectiveness, and political autonomy. Ironically, central bankers may now get a response from other policymaking entities, which, instead of helping to normalize their operations, would make their task a lot tougher.

Let’s start with the US Federal Reserve, the world’s most powerful central bank, whose actions strongly influence other central banks. Having succeeded after 2008 in stabilizing a dysfunctional financial system that had threatened to tip the world into a multiyear depression, the Fed was hoping to begin normalizing its policy stance as early as the summer of 2010. But an increasingly polarized Congress, exemplified by the rise of the Tea Party, precluded the necessary handoff to fiscal policy and structural reforms.

Instead, the Fed pivoted to using experimental measures to buy time for the US economy until the political environment became more constructive for pro-growth policies. Interest rates were floored at zero, and the Fed expanded its non-commercial involvement in financial markets, buying a record amount of bonds through its quantitative-easing (QE) programs.

This policy pivot was, in the eyes of most central bankers, born of necessity, not choice. And it was far from perfect.

 …click on the above link to read the rest of the article…

“She Has A Flair For Darkness” – Meet The Woman Tasked With Predicting How The Fed Will Blow Up The World

“She Has A Flair For Darkness” – Meet The Woman Tasked With Predicting How The Fed Will Blow Up The World

Central bankers have two key roles: the first, and more trivial one, is to set the price of money by adjusting short-term interest rates, something they have been doing since the advent of central banking; the second and far more important role (especially in recent asset bubble-bust history) is to preserve the public’s confidence in a financial system that is effectively a ponzi scheme, reliant on both the constant creation of money in the form of new debt and society’s willingness to spend and not save said money, by propping up asset prices or vowing to do everything in their power to avoid another Lehman-type financial catastrophe. Here one need only recall the immortal warning of Mario Draghi to support the artificial European currency at its moments of greatest despair, “whatever it takes.”

It is this second key role that also has forced central bankers to attain an aura of infallibility: after all, if central bankers admit they don’t know what they are doing, how can they convince others that “all shall be well.” Here, too, one can recall Mario Draghi’s vows – which we now know were lies – that the ECB “does not have a Plan B” in case Greece exits the Eurozone, as the mere contemplation of such a worst-case scenario would create the self-fulfilling reality that central bankers are trying to avoid. Another such example is Ben Bernanke’s iconic prediction from 2007 that “subprime is contained.” Everyone remembers what happened next.

 …click on the above link to read the rest of the article…

Battle for Control

Battle for Control

Markets are engaged in a clear battle for control: An active Fed eager to extend the business cycle using asset price inflation as its primary means to generate further debt financed growth on the one hand and deteriorating fundamentals and technicals gnawing at an artificial market construct on the other.

Let’s call a spade a spade: Markets would not be anywhere near new highs were it not for a Fed flip flopping and racing from dovish media event to dovish media event. I’ve been very vocal in my criticisms of their efforts and sense they are playing a dangerous game here. Hence I don’t want to belabor the point here today. But as a follow up: Friday’s desperate efforts on the side of the Fed to backtrack market expectations for a 50bp rate cut at the coming July meeting, which they themselves caused on Thursday with multiple Fed speakers, has revealed again the Fed’s singular role it has to devolved into: The market’s primary price discovery mechanism. As markets dropped below $SPX 3,000 this week dovish Fed speakers caused a renewed rally above 3,000 and as soon as they tried to walk it back with a conspicuous WSJ Journal article on Friday markets again soon rolled over.

That’s the circus atmosphere they have created and appear to be supportive of. The Fed is very aware of its role in all of this and it’s shameful. Like Alan Greenspan or not, but at least he was a cryptic speaker that left markets guessing and played his cards close to the vest. But over the years the Fed has devolved itself into this clown show we have now, a day to day manager of markets. And markets have learned to react to every single pronouncement and utterance.

 …click on the above link to read the rest of the article…

Who Bails Out Central Banks in Coming Chaos –James Rickards

Who Bails Out Central Banks in Coming Chaos –James Rickards

Best-selling financial author James Rickards says “We are still in the aftermath of the 2008 – 2009 financial crisis.” In the up-coming book titled “Aftermath: Seven Secrets of Wealth Preservation in the Coming Chaos,” the crisis of the Great Recession may be over, but “nothing is fixed.” Rickards explains, “I understand the economy has been expanding for 10 years, and we are not in a liquidity crisis at the moment and unemployment is low. We have come a long way from that. The fundamental problems that gave rise to that have not been solved. . . . So, unlimited guarantees, unlimited money printing and unlimited currency swaps and, yeah, they truncated the crisis, but all that happened was the bad debts, the leverage and the problems were now lifted up to the central bank level. You’ve got this progression. First, it is the hedge fund. Then, it’s Wall Street. Now, it’s the central banks. Who is going to bail out the central banks? That problem has not been solved, and it’s still on the table.”

Rickards says don’t think the Federal Reserve is going to come in and ride to the rescue in what Rickards is predicting to be a “coming chaos.” Rickards contends, “Interest rates are 2.25%, but that is not what you need to get out of a recession. I am not predicting one, but if the U.S. economy went into a recession . . . history in economics says you need to cut interest rates 4% to 5% to get the U.S. out of a recession. How do you cut interest rates 4% when you are at 2.25%? You can’t because there is not enough room.

 …click on the above link to read the rest of the article…

Weekly Commentary: Central Banker to the World

Weekly Commentary: Central Banker to the World

July 11 – Bloomberg (Rich Miller): “Federal Reserve Chairman Jerome Powell is starting to sound a bit like he’s the world’s central banker. In Congressional testimony this week, he repeatedly cited a slower global economic expansion in laying out the case for easier U.S. monetary policy. ‘There’s something going on with the growth around the world, particularly around manufacturing and investment and trade,’ he told the House Financial Services Committee… as he all but promised an interest-rate cut at the end of this month.”

Chairman Powell was decisive. While not directly announcing an imminent cut, he essentially pre-committed to reducing rates at the July 31st meeting. Record stock prices don’t matter. Booming corporate Credit is no issue. June’s big gain in payrolls and a 3.7% unemployment rate are not part of the decision function. A Friday afternoon Bloomberg headline resonated: “A Stock Market Dying to Know What Powell Knows About the Economy.”

The so-called “insurance” rate cut is all about the global environment, with monetary policy’s traditional domestic focus relegated to history. The reduction will be justified by “crosscurrents,” “uncertainties” and below-target inflation. But is the global economy really in such bad shape to warrant preemptive monetary stimulus during a period of market ebullience? What Does Powell – and his cadre of global central bankers – Know?

China’s GDP is expected to expand between 6.0% and 6.5% this year. While slowing, growth throughout EM is forecast between three and four percent.  Nothing to write home about, but euro zone GDP is expected to exceed 1.0% this year. Japan could see 3.0% 2019 GDP growth. Bank American Merrill Lynch today lowered their forecast for 2019 global GDP growth to 3.3% from 3.6%. Deserving of even lower rates and more QE?

 …click on the above link to read the rest of the article…

The Four Dimensions of the Fake Money Order

The Four Dimensions of the Fake Money Order

A Good Story with Minor Imperfections

If you don’t know where you are going, any road will get you there,” is a quote that’s oft misattributed to Lewis Carrol. The fact that there is ambiguity about who is behind this quote on ambiguity seems fitting. For our purposes today, the spirit of the quote is what we are after. We think it may help elucidate the strange and confusing world of fake money in which we all travel.

Consumer price index, y/y rate of change – the Fed is not satisfied with the speed at which monetary debasement raises everybody’s cost of living lately. And no, they don’t think said speed should be lowered. [PT]

For example, the monetary policy outlook immediately following last month’s FOMC meeting was as clear as a flawless (FL grade) diamond. The principal message, if you recall, was that inflation was muted and the Fed, after suffering an overt beating from President Trump, would soon be shaving basis points off the federal funds rate. You could darn near take it to the bank.

Wall Street took the news and acted upon it with conviction.  Investors piled into stocks and bonds without pausing to take a closer look for imperfections.  Why worry when fortune favors the bold?

From June 19 through Wednesday July 3, everything held up according to plan.  The S&P 500 rallied 2.5 percent to close at a new all-time high of 2,995. The yield on the 10-Year Treasury note, over this period, dropped 13 basis points, as mindless buyers positioned to front run the Fed.

But then, in the form of Friday’s job’s report, several feathers of imperfection were identified.  According to the Bureau of Labor Statistics, the U.S. economy added 224,000 jobs in June. This far exceeded the consensus estimates of 160,000 new jobs.  As this week began, doubt and hesitation crept into the market.  What to make of it?

 …click on the above link to read the rest of the article…

Blain’s Morning Porridge – July 10 – Will Boeing trigger Crash?

Blain’s Morning Porridge – July 10 – Will Boeing trigger Crash? 


“Ignite blue touch paper and step back. Do not let Children play with Fireworks.” 

All eyes on what Powell tells Washington today, but a number of Porridge Readers called to tell me I’m wrong about summer risks! They think my expectation for a long worried nervous but stable summer before markets are bailed out by accommodative central banks in late Q3 is way too optimistic. 

A number feel markets are ripe for a sudden and painful rollover in bonds and stocks – and much sooner than I think. What they did agree with was my assessment the likely trigger for a market shock will be a “no-see-em”, something so obviously hidden in plain sight it catches us completely and painfully by the short and curlies. 

And “Plane” sight might be a good way to put it. I’m wondering if Boeing might be the trigger! (See what I did there..?) 

Hang on? We all know the next market collapse isn’t booked till October? Well maybe not. What if someone tries to start the market apocalypse early? That would shock the many market participants who think the perception of a Global Central Bank put means there is nothing to worry about. Complacency is a terrible thing. 

Smart bond gurus are shouting bubble! Although US junk bonds have not tightened as much as treasuries through the last uptick, they are still at incredibly tight spreads. European sub-investment grade is rallying in the expectation a tide of new ECB investment grade purchases will lift all boats. Yet, with yields so low as to completely discourage any dealer inventory (which is too high a capital cost anyway), liquidity has never been so thin.

 …click on the above link to read the rest of the article…

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