Notes From Underground: Schauble Pivots, Brainard Postulates

The unemployment data was not as robust as expected but not bad since hourly wages rose above consensus, the work week remained elevated and the jobless rate dropped to 5.8%. The headlines are always subject to severe review doing these tumultuous times. The question remains: Why did the BOND market experience a sizable rally even as the DATA was well within range of expectations. There is a great deal of pressure on the U.S. overnight market as vast amounts of liquidity searches for a home.


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The FED had been searching for ways to keep short-rate from going negative so MAYBE the SOMA/FOMC are purchasing further out of the curve. If so, then any short positions in longer-dated debt will be subject to intense rallies as traders will be pushed to cover losing positions.

The recent steepening in the 2/10 and 5/30 curves due to increased concerns about inflation–which the FED insists is transitory—may have prompted some stealthy type of yield curve control. It is a new spin on the old rule: Don’t fight the FED. At this juncture we don’t know enough but BOND BEARS need to be cautious for a central bank  bent on containing yields on longer term bonds can be a powerful force for resisting market sentiment.Do your technical work to apprise the bigger picture of FED desires.

The U.S. Treasury also wants to keep its borrowing costs as low as possible. One potential fundamental lifting bonds is if Congress does not agree on the massive stimulus package proposed by the Biden administration. But any failure of increased stimulus would see the stock market also correct as anticipation of stimulus gave way to disappointment. The S&P/BOND simple relationship, which has served us well over the last 25 years, should continue to be an important chart. DO YOUR WORK for the chart has been a key barometer of critical turns in the market — specifically October 2017 and October 2018.

***During the height of the pandemic-induced financial crisis, Bundestag President Wolfgang Schauble wrote an opinion piece in the Financial Times, which I referred to as a pivot away from his well ensconced fiscal frugality. I said that the pivot was an important moment because he opposed giving loans to economically stressed EU nations but rather providing large grants. The eminent austerian put it in poetic fashion: Giving loans was like providing rocks, while GRANTS would be equivalent to BREAD.

Now, one year later Schauble is pivoting again. This time in a Financial Times piece titled, “Europe’s Social Peace Requires A Return to Fiscal Discipline.” He acknowledged the need for a pivot for the fears of sovereign debt not being repaid causes the anxiety about inflation. He said, “Borrowing in times of crisis to stabilise the economy makes sense,as long as the question of repayment is not forgotten.”

The ECB and EU Commission were correct in their crisis management but as the pandemic recedes it is time to roll back the intervention. Schauble fears the societal consequences from the rapid rise in public borrowing that leads to ever increasing disparity between rich and poor. He went on, “Public borrowing increases their wealth,widening the gulf between rich and poor. Keynes once warned the profiteers would become the object of hatred. Now the gap between “haves and “have nots” poses a huge threat to social cohesion.”

This warning from Schauble carries weight as he is the President of the Bundestag and thus has a great influence on Germany’s budget process. Last year the Merkel Government was able to suspend the “Schwarz Null” or black-zero rules on on Germany’s self-imposed debt restrictions. In a recent German High Court ruling, the Karlsruhe decided that the actions of the Bundestag to oversee the necessity of ECB bond purchases based on “a proportionality assessment” and thus fulfilled the requisites of German law. Schauble has great standing in Germany so we need to keep an eye on this.

***In an appearance before the Economic Club of New York, Fed Governor Lael Brainard delivered a speech t”Remaining Steady As the Economy Reopens.” The speech provides more support to the transitory nature of the current rise in prices providing support for keeping rates lower for longer. While noting that the vast pool of savings is providing for consumption coupled with the robust fiscal stimulus. She said:

“The timing of household consumption out of the accumulated savings will be very important for the strength of demand not just this year, but as next. TODAY’S FISCAL TAILWINDS ARE PROJECTED TO SHIFT TO HEADWINDS NEXT YEAR. SO AN IMPORTANT QUESTION IS HOW MUCH HOUSEHOLD SPENDING WILL CONTINUE TO SUPPORT GROWTH INTO NEXT YEAR AS OPPOSED TO SETTLING BACK TO PRE-PANDEMIC TRENDS, WHICH WOULD BE AN ADDITIONAL HEADWIND RELATIVE TO THE STRONG MAKEUP CONSUMPTION WE HAVE SEEN SO FAR THIS YEAR,” (emphasis mine).

This is one of the FED‘s critical leading voices, carrying more weight than the chattering nabobs of regional presidents that fill the empty void of financial news. Brainard was the one pushing Yield Curve Control in 2020. Her position on lower for longer has stature. It seems that the Biden tax hikes are now the key to the inflation is transitory school of policy making. The differences between concerns of two policy makers — Schauble of Germany and Brainard of FOMC — cannot be more stark. The outcomes from the said policies will provide opportunities for traders in a myriad of assets. We will follow these discussions in a search for profitable trades and investment.

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