First of all, my offer of any part of a $10,000 bet with 10-1 odds against Jerome Powell being renominated as FED CHAIR is OFFICIALLY RESCINDED. The Fed Chair’s speech was so pathetic that it can only be explained by his desire to be renamed central bank head. Powell’s speech would be called DOVISH on any given week but there were six FED presidents speaking out in favor of moving up the schedule for tapering QE to counterpunch. It was not only the increased hawkish stances of previous UBER DOVES, which provided cover for Powell but the highly esteemed Mohammed El-Erian and Larry Summers also called for the FED Chair to be bold at Jackson Hole.
Blackrock’s Rick Rieder also foamed the market runway by noting that QE had no effects on the anything but asset prices. Powell had stock prices at record highs as a support to cushion the blow of any “TAPER TANTRUM.” Throw in the recently announced Standing Repo Facility and and “taper tantrum” will actually be soothed by massive finances to support BOND PRICES. Everything was in place for a stepped up pace of curbing asset purchases to contend with the headline inflation of 4%, but this chair was not for turning.
While FED presidents spent the week worrying about the rise in consumer prices, Powell used Friday’s speech to return to the EMPLOYMENT MANDATE. This is no surprise for readers of NOTES FROM UNDERGROUND because we have called Powell the Minister of Social Justice as he maintained that providing the jobs for those who “through no fault of their own” became unemployed. On Friday the mantra was elevated as Powell cited the transitory nature of used car prices and other raw material goods. JOBS WERE ONCE AGAIN PARAMOUNT, pushing back against the desires of many FED members worried about inflation. Powell proved yet again that the central bank can choose either mandate to suit the purposes of lower for longer.
The Wall Street crowd were relieved by Powell’s dovish stance, which pushed the S&Ps to yet another record high. The problem for Powell was that the DOLLAR and GOLD as many other commodities rallied in sympathy. With three masters to serve the FED has a great deal of flexibility. The COUNTERFACTUALS of choice provide unlimited rationales for America’s monetary authority. The DOVISH speech as many of my e-mails proclaimed my have been meant to serve Powell’s masters in the White House. Unless…
It may be that the FED and the U.S. Treasury have come to see the value of the DOLLAR as critical to the GLOBAL FINANCIAL RECOVERY. If the FED were to move preemptively to end QE while the ECB, BOE, BOJ and others kept QE on full throttle it might result in a DOLLAR RALLY. This is problematic because over the last three years the emerging markets have borrowed massively in dollars because of the very low RATES. As we saw in March/April 2020, a DOLLAR RALLY can cause tremendous tension for foreign-based DOLLAR DEBTORS.
The FED‘s liquidity flood has led to huge dollar borrowings, which again prove Milton Friedman’s economic rule, “There Is No Free Lunch.” On the Financial Times’s website Sunday, there’s an article making the DOLLAR aspect of Powell’s dovishness credible, titled, “Emerging Economies Cannot Afford “Taper Tantrum’ redux,Says IMF’s Gopinath.” The IMF’s Chief-Economist noted that “a lot of the problems we’re facing, even with regard to inflation and supply bottlenecks, have to do with the fact that we have the pandemic raging in different parts of the world.”
Gopinath warns that because of the raging pandemic, “emerging markets are facing much harder headwinds. They are getting hit in many ways, which is why they just cannot afford a situation where you have some sort of a tantrum of financial markets originating from the major central banks.”
Former IMF Chief Economist Maurice Obstfeld said in the same FT article government debt in large emerging economies rose to 60.5% in 2020 from 52.2%. It was the biggest surge on record. There is genuine concern about “an increase in the tightness of dollar financing conditions and perhaps a reversal of capital flows.” Maybe this is what prompted Powell’s dovish speech but if so then we must become hyper-sensitive to the FED‘s triple mandate: global finance because of the world’s dependence on dollar finance. Again, we see the outcome from the SWISS NATIONAL BANK DECISION JANUARY 15, 2020 when borrowers in cheap Swiss interest rates got crushed by an appreciating Swiss franc. Nothing is every as it seems in the world of 2+2=5.
Here’s a recent podcast recorded on Thursday morning as I sat with the Financial Repression Authority’s Richard Bonugli, the highly respected Harley Bassman and Brian Pelligrini. Enjoy the discourse as there was lots of disagreement but clarifying potential potential profitable trades. Pour a quality libation and listen to the issues raised for your potential profit.