Notes From Underground: Neutral

On Friday I sat down with Richard Bonugli at the Financial Repression Authority and Doomberg to discuss the current situation in global energy and tried to peek into the future as to where Europe and the US are going to find the means to provide dependable and affordable energy to power economic growth. Enjoy the podcast and hopefully it will lead to more high levels of discussion on all things global macro.

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In the last 10 days we have seen two sets of economic data upon which the FED‘s dual mandate is most dependent: unemployment and inflation measures. The jobs data was very strong while the price measures showed a slowing theme, especially as GAS prices at the PUMP have trended lower for several weeks. The result has been that the markets have gone back and forth on the theme of 75 basis points versus 50 basis points at the next FED meeting in September.

The market is currently leaning toward 50 basis points, which is perceived as a DOVISH hike so myriad of asset prices have found support as buyers look for asset classes that appear cheap in the face of the proverbial SOFT LANDING. For us at NOTES FROM UNDERGROUND this is the definition of NEUTRAL as it reflects trading opportunities. The EQUITY markets have recovered more than 50% of their first-half losses stoking the call from WALL STREET that it is all clear WEENA. BUT I CAUTION: This is not an INVESTING MARKET BUT TRADING MARKET as we await to hear from Chair Jerome Powell on the FED‘s future path, especially as the central bank’s balance sheet reduction ramps up to its maximum levels next month. NOBODY can be certain of the impact of removing liquidity from what has been an over-leveraged market living on the liquidity drug provided by QE.

It was then-Chair Ben Bernanke 12 years ago at Jackson Hole that provided the “morphine drip” to ensure what he defined as the PORTFOLIO BALANCE CHANNEL, or forcing savers to take money from their mattresses and place it in riskier assets to unleash capitalism’s animal spirits. When bond investors and depositors wrote letters to the FED complaining of no interest earnings in a ZERO RATE INTEREST RATE policy environment, Bernanke and future Fed Chair Janet Yellen both called for interest earners/rentiers to stop complaining and celebrate their rising stock portfolio, home prices and celebrating that their children and grandchildren all had jobs (this is fact not a false narrative).

Is Powell going to claim that the age of the RENTIER class has been revived as interest rates are now providing some modicum of revenue? Yes, real yields are still negative but its getting better all the time. Eighteen months ago $1 million dollars of a one-year TREASURY BILL earned $1,500. Today, that would net investors $32,000. Times are changing and as QT hits full speed how much will this affect returns for bondholders? We don’t know but if the FED were to get to a TAYLOR RULE-type of neutral in an effort to defeat inflation, several asset classes are going to several a downward movement. NEUTRAL is a place policymakers aspire to but investors will find difficult to navigate. See you in Jackson Hole.

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