Waiting for Jay Powell

We clutch for normality as the next Fed decision point nears.  Will the FOMC raise rates or not?  The media takes comfort from the presence of several trained economists in the room to help poor non-economist Chairman Jay Powell find his way.  We'd prefer an attentive service dog.  But when terms like “confidence” and “credibility” fill the air, just how does being an economist better guide the FOMC? If we are using the tools of the psychologist, how does a close familiarity with statistics and the economists’ version of mathematics help? 

The economist love cult in the world of investments and related media is so overwhelming that there is little actual discussion of the actions of central bankers.  To review, central banks have bought about $10 trillion worth of securities, distorting private markets from stocks to bonds to real estate and commodities.  Credit spreads are extremely tight and recovery rates on many real assets are so good (that is, skewed) as to suggest that credit has no cost.  The markets tremble with expectations of sudden mean reversion.

Former Federal Reserve Board Chairman Ben Bernanke has been on the speaking circuit, taking bows for his great accomplishment of rescuing the world from debt deflation. But now, all of a sudden, Chairman Bernanke is telling us that the wheels are coming off of the proverbial cart in 2020 or about two year’s time.  Is there some connection between Bernanke’s previous acts and this approaching downturn?

The hubris of Chairman Bernanke is monumental as befits a demigod.  All of the immortals who sit in the big room at the big table and guide the monetary machinery seemingly believe themselves to be infallible.  Using imperfect data and even less perfect operative models to guide their actions, the FOMC pretends to be in charge.  But it fact it is the Treasury that is calling the shots in terms of interest rates and the economy.

Our friend Lee Adler has noted with his usual precision that the FOMC is in the midst of the biggest tightening cycle ever, this by simply raising the target rate for Fed Funds and allowing the portfolio to roll off at $20 billion per month.  The FOMC is not even selling bonds, merely not reinvesting.  This runoff is a mere rounding error compared to the funding operations by the Treasury, yet the financial markets remain fascinated with the Fed.

So as the FOMC deliberates and then holds a presser tomorrow, keep in mind that the same forces that have kept interest rates and, more important, credit spreads constrained over these past few years are now holding down returns on bonds as well as volatility.  The $10 trillion in central bank purchases is unhedged and completely passive, thus volatility is constrained. 

With the huge increase in Treasury issuance, spreads should be widening as benchmark rates rise, but instead HY spreads are tightening, long bonds are stable, and the dollar and stocks are soaring.  All of this abnormality, yet we wonder why oh why as the US sucks capital out of the rest of the world to feed our insatiable desire.

As I said, we are clutching for normality in truly strange times.

Comments

nostops4me Wed, 06/13/2018 - 03:59 Permalink

Normality?  Using "traditional" metrics and theoretical cause/effect relationships are as out of date as President Warren Harding's desire to return to normalcy.  Predicting market forces today requires a peek at a playbook hidden from the public...

Rex Titter Wed, 06/13/2018 - 04:50 Permalink

Does anybody else here feel as if they have had a fork stuck in them recently to check for doneness.  Uncle Sam is bankrupt and kiting like a fiend...and this has been going on for nigh on ten years.  Just how much longer can TPTB keep this kabuki theater going? 

With every passing day, people on fixed incomes are inching closer to the pet food isle.  Something has got to give.  The rot in .gov and .biz is just getting deeper and deeper. 

Who is willing to stand up and tell the MSM that they are truly the enemies of mankind. 

Quantify RibbitFreedom Wed, 06/13/2018 - 09:15 Permalink

Ron Paul can't stop anything. Sure he can tell them, but that does nothing. Collapse is the only ending I see in sight. Now what that collapse results in is another issue. It could go various ways. 1. A Fascist government. 2. A revolution and a new open society (not likely)

3. Total collapse and murder running wild in the streets. Basically the zombie apocalypse.

Probably other scenario's as well.

In reply to by RibbitFreedom

trueFacts Wed, 06/13/2018 - 07:49 Permalink

until china, or russians, or france, or saudis, or iranians have 20 aircraft carriers, ...the dollar will remain good as gold.  ...also explains the latest news of de-nuking the norks.

JibjeResearch Wed, 06/13/2018 - 11:07 Permalink

Come on J.Powell....., what will you do?

Raise it or low it?

BWahahah ahhahahahahaha

I don't really care which one...., regardless, there will be some form of suffering because of previous carelessness!

TigerK Wed, 06/13/2018 - 11:26 Permalink

Just wait till Hostilities break out !

And - large-scale.War errupts.. Across multiple theatres .. 

The Leaders in the West - those straw puppets - who hv consistently exported Weapons, Lies, who hv Cheated, lied, supported & encouraged insurrection, Regime change etc - along with their brain-dead populations in the West - 

When they themselves face WW2 style devastation of Europe - & the welfare State collapses - as it already is..teetering 

Bombed like Iraq, Afghanistan, Libya, Syria, razed to the Ground - their infrastructure devastated in an Apocalypse-like series of devastations

When Hunger, Violence, Death Famine & Destruction stalk the land and devouring their children & families ..

When this devastated North America & its Allies across the world..

When they have to Answer for their Actions, When they have to pay for what they have done - inflicted - on the peoples of this Planet..

When the Bushes, Clintons, Kissingers, Cheneys, Soroses, Billionaires & their puppets in Govt, Deep State etc, the Blairs, Rumsfelds, Rockefeller's, Rothschilds, Banksters & their henchmen - and all the other Complicit Get - Rich -Quick - Criminals - are rounded up, strung up ..and despatched.. to shallow graves - like the vermin, scum that they are..

Then - will perhaps your eyes be Opened.. Blind as you have been, to this disgusting, spectacle of infamy, Greed and Bloodlust