Notes From Underground: SIN or WIN, It’s a Generational Thing

In 1976, when I was beginning my long march toward acquiring knowledge to analyze markets Gerald Ford was running for reelection. Inflation was gaining strength so the FORD campaign was bent on making America believe that he had the fortitude to break the inflation spiral threatening the Middle Class. Campaign buttons said W.I.N. (whip inflation now). Getting inflation under control was seen as the paramount issue.

When I was wandering through a flea market in New York in 2007, I found an original WIN button that I bought for $1.25. See? Paul Volcker did whip inflation. (I gave the button to the best financial plumber, James Aitken, as a token of appreciation for all the knowledge he imbued in me about the plumbing of the short-term funding markets.)

In 2008 (and in the present),we changed the mantra to S.I.N., START INFLATION NOW, as the FOMC was trying to prevent a deflationary spiral from taking hold during the onset of the GLOBAL FINANCIAL CRISIS. The great fear of then-Federal Reserve Chairman Ben Bernanke was that the entire financial system would go into liquidation meltdown as debtors/creditors rushed to sell assets in an endeavor to cut losses while raising cash to meet margin calls. Bernanke was terrified of a repeat of 1937 when the U.S. economy went into a severe recession because of FED and TREASURY moves to begin austerity in the face on rising growth.

The TREASURY was in a hurry to rein in the massive deficits instituted by the Roosevelt New Deal, though it was too soon as it while the FED was tightening a bit. (We call this the DOUBLE WHAMMY of economic contraction.)

Now, the FED seems more concerned with unemployment than inflation as Federal Reserve Vice Chairman Richard Clarida last week noted that REAL unemployment was still 10%. The central bank still points to unmet inflation targets as being the most important policy to pursue. So let us all get our S.I.N. buttons on because the FED wishes us to START INFLATION NOW as it pursues employment while using monetary ILLUSION to lessen the massive debt overhang.

Monday on Bloomberg T.V. Alexandra Harris (who also happens to be my progeny) laid out the battle of the market pushing the long-end of the curve higher in an effort to elicit some response from the FED about what level of steepening causes the most angst at the FOMC. What this means is where/when will the FED engage in Yield Curve Control in an effort to keep long-term yields down so as not to disrupt the BUDGET. How much will the curve steepen is the operative battle cry of traders?

Historically, the long-end of the curve has not been the determinant variable in setting asset prices BUT WITH SHORT-TERM RATES NAILED TO THE ZERO BOUND THE ALGOS HAVE LEANED UPON THE 30-YEAR BOND AS THE DETERMINING VARIABLE OF MYRIAD ASSET PRICES. Algos work until they lose the true CONTEXT of the UNDERLYING FUNDAMENTALS. As always, markets are dynamic where LOUIS GAVE has it right: Adaptation is the key to successful trading/investing while FORECASTING IS FOR HEADLINES.

Put on your S.I.N. buttons and drive the FED to YIELD CURVE CONTROL, the mother of all tools in the YELLEN/POWELL toolbox.

***As a follow up, I will discuss the FEDECBPBOCDOLLARMETALS and anything else on your minds.