Notes From Underground: We're Back?

It has been quite an extended period since my last post, but now I’m trying to catch up on some reading and relevant research on all things pertinent to GLOBAL MACRO. Following the FEDERAL RESERVE’S INTEREST RATE DECISION and the POWELL PRESS CONFERENCE, I sat down with Richard Bonugli, Peter Boockvar and Daniel Lacalle. This 66-minute podcast is packed with several pertinent topics, including yield curves, the dollar, Europe and even ESG investments. Please enjoy and I await your feedback and hopefully disagreements. Only the parochialist in echo chambers pursue validation.

Click here to listen to the recording.

One of the critical discussions taking place in the mainstream media is the issue of whether the U.S. has entered a RECESSION.This is nonsense except for the need for sensational headlines. Yes, the standard definition for the last few decades is two successive quarters of negative growth as determined by the National Bureau of Economic Research (NBER). This has always irritated me as the NBER announcement always came after the economy had already started to experience growth.

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Before the FOMC started trying to CONTROL yield curves and sovereign debt prices, the markets were very adept at signaling economic conditions. The desire of the FED to control debt prices has led to a breakdown of bond markets as signaling mechanisms. Even the US central bank has admitted they ought to be more humble. Whether or not we are OFFICIALLY in a recession is just political narrative landscaping as an effort to generate the newest designs on the citizens tax payments.

We keep out of politics here at NOTES FROM UNDERGROUND in order to prevent it from undermining the quality of discussion. So we’re going to take the recession narrative and shove it. That has no home here. Yield curves will provide more data if they are allowed to FREELY BREATHE. The current 2/10 inversion, moving toward the lowest levels since 2000, is bothersome and reflecting the slowdown seen in corporate guidance: Walmart, AT&T, Verizon and some credit agencies are all experiencing some stress due to overextended consumers. Auto repossessions are rising even with unemployment residing near record lows.

Mr. Boockvar was very early in catching delinquencies on AT&T consumer payments. Walk the streets of Anytown, USA and it is a sure thing that people will not jeopardize their cell phones. The consumer data is beginning to reflect an economic slowdown but how deep it goes is far from known. Will it be enough to scare the FED into a softer approach to curbing inflation? Powell did say that NEUTRAL for interest rates is deemed to be 2.25-2.5% even as headline inflation measures 8%. Naturally, Larry Summers immediately took Chair Powell to task in a Bloomberg Television interview on Friday.

Before Summers’s critique, the markets responded immediately to Powell’s comments in response to a question from Financial Times reporter Colby Smith. All asset classes began to rally immediately upon the belief that Powell was putting down a “dovish” marker. The asset rally continued as equities soared, precious metals reversed their recent selloff, commodities gained renewed strength and the yield curves slowed their flattening. Most importantly, the DOLLAR closed lower on the week, reversing pre FOMC gains.

The strong dollar is not a blessing in these tumultuous financial conditions as it places a great deal of stress on the world’s emerging markets, which are BORROWED in US DOLLARS due to the FOMC’s flooding the global system with very low interest possible loans. Cheap dollar loans become expensive when interest rates rise and the cost of DOLLARS rise along with it. A classic case of this was in January 2015, when Eastern European countries borrowed in Swiss francs because of low Swiss interest rates coupled with a guaranteed level of euro/Swiss franc at 1.20, A NO BRAINER.

But when the Swiss National Bank could no longer hold the PEG the market panicked and the SWISS FRANC rallied in dramatic fashion, leaving borrowers stuck having to repay with expensive Swiss francs. This is the current situation confronting the massive amount of loans held by private and public emerging borrowers with prior cheap dollar loans. This is just the beginning of this important discussion.

A note to our readers: After more than 1,500 posts at this site, we will be migrating our musings to Substack in the coming weeks. My hope is that we can make this as seamless as possible so as to ensure subscribers will still receive Notes From Underground (yes, we’re bringing the name with us). Stay tuned for more updates. — Yra

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