pebblewriter

Tag: Powell

  • Powell: Let’s Get This Party Started

    Jerome Powell gave a good news/bad news speech to the Economic Club of New York. He noted that employment is still 10 million below February 2020 levels and that a broader range of unemployment would put the current rate at 10%, adding, “We are still very far from a strong labor market whose benefits are broadly shared.”

    As the algos were spinning up their sell orders, he delivered the good news upon which the market relies: “Achieving and sustaining maximum employment will require more than supportive monetary policy.” He added that it could take “many years” to overcome the effects of long-term unemployment and scoffed at the idea of problematic inflation.

    From my vantage point, he’s right and he’s wrong. The strong earnings and cheerleading from pandemic lockdown beneficiaries have drowned out the wails from the pandemic’s have-nots: those who find that even a $1,400 stimulus check won’t pay the rent, the millions of small businesses and self-employed who couldn’t qualify for PPP loans, the millions for whom unemployment  benefits are unobtainable or inadequate.

    But, make no mistake about inflation. Yesterday’s CPI data reiterates our long-held conviction that, although official core inflation is mild, actual inflation is much higher.  Even the understated official CPI will soon soar to levels not seen since before the pandemic (when 10Y yields topped 2%) unless the manufactured rebound in oil and gas prices unwinds posthaste.

    The morning after, futures have regained most of their losses and are again knocking on the door of the 1.272 Fibonacci extension……thanks primarily to yet another VIX “breakdown” from its rising channel which, as we discussed yesterday, has produced another bearish (bullish for stocks) 10/20 SMA cross.Will it be enough to offset the cold water with which Powell just drenched the reinflation trade?

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  • CPI: Nov 13, 2019

    Today is off to an interesting start.  Following Trump’s call for negative interest rates and more grandstanding on China in New York yesterday, headline CPI came in hotter than expected but right in line with our forecast. As we’ve discussed, this is the result of oil and gas trending sideways in support of the upcoming Aramco IPO.

    On top of all that, the impeachment hearings get underway at 10AM and Powell testifies before Congress beginning at 11AM. EIA inventories are delayed until tomorrow due to the holiday.

    It was enough to knock ES down by about 17 points where it finally reconnected with its SMA10 on the 8th session in a row during which it tagged its 2.618 Fibonacci extension.

    It should be a pretty exciting day for a change.

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  • Why Interest Rates Must Not Rise

    In May 2014 many of us were shocked by a report that Ben Bernanke, who had recently departed the Fed, told a group of wealthy investors that he did “not expect the federal funds rate…to rise back to its long-term average of around 4%” in his lifetime.

    I remember feeling Bernanke’s statement represented both extraordinary hubris and wishful thinking. Surely, the trillions being pumped into the financial system would drive inflation to levels that would produce higher rates.  After all, I reasoned, the bond market isn’t as easily manipulated as is the stock market.

    Last year, I called attention to the fact that the cost of servicing the US debt had broken out to new highs [see: Why Rising Rates are a Problem This Time.]  Even though interest rates had fallen dramatically, the spiraling debt had send annual interest expense on that debt to roughly $450 billion in FY 2017.

    Bernanke’s 2014 words came back to me as I did the math.

    Clearly, if rates were to normalize the interest expense would be unmanageable… Between 2000 and 2007, the average interest rate was 4.84%.  On the current $20.6 trillion balance, that would mean an annual interest expense of roughly $1 trillion.

    Of course he was confident in his prediction!  He understood that rates could never be allowed to rise.  A return to normalcy — and, I don’t believe this to be an exaggeration — would absolutely destroy the economy.

    I had always found the Treasury’s increasing dependence on short-term, floating rate and inflation-indexed borrowings a bit unsettling. Why not lock in a boatload of 30-yr bonds at 2.1%?  Now we know.

    In their wisdom (or desperation…time will tell) the central bankers and those maxing out America’s Gold Card have bet our very futures that Bernanke was right — that everything will be okay in the end…as long as the end never gets here.

    By the way, here’s an update of the above chart…which has been appropriately renamed.

     

     

     

  • Not Exactly Reassuring…

    The markets weren’t exactly reassured by Powell’s testimony yesterday.  Bottom line, no one in their right mind buys the idea that we can have such strong GDP and wage growth but still need such accommodative policy. IMO, Powell was curt and sometimes downright evasive, which didn’t help matters.

    Stocks plunged to our initial downside target, closing well below the SMA10 (a rarity, lately) with additional downside potential this morning.

    AAPL tested its channel top and retreated.  As we discussed yesterday, this failure to break out has weighed on the overall market.continued for members… (more…)