Thursday, June 3, 2021

Morning Note: Fed Failure Not An Option

Jobs news this morning suggests that last month's hiccup was, well, maybe just a hiccup. Payroll company ADP says 978k folks found jobs in May, which is an astounding 328k more than expected, while weekly jobless claims continue to come down: 387k in this morning's report, vs 385k expected and 21k lower than last week. This Friday's official May jobs number will be telling...

Yesterday's release of the Fed Beige Book -- a report on economic conditions across all 12 Federal Reserve Districts -- tells of a growing economy and optimism over the future, although buffered by some serious concerns about present and future inflation. 

We've been clear that in our view the Fed, with all of its monetary magic, has effectively tied its own hands behind its own back. Quite the trick! Nevertheless, while, like I said in yesterday's note, they'll deny the presence of longer-term inflation risk to their graves, they need to at least talk tough. That is, they'll suggest that indeed they stand ready to pull out the guns -- i.e., pull back the liquidity -- should, despite their steadfast sanguineness, inflation rear too much of its ugly head.

Case in point, non-voting Fed governor Patrick Harper said yesterday: 

"I think it is appropriate for us to slowly, carefully move back on our purchases at the appropriate time."

As utterly benign as that sounds (threatening a squirt gun, maybe), make no mistake, that softball statement contributed to this morning's selloff in the equity space. Today's positive employment news, ironically (in that it justifies less-friendly Fed action going forward) probably isn't helping either. 

Asian equities were mixed overnight, with 7 of the 16 markets we track closing lower.

Europe's mostly red this morning, with 13 of the 19 bourses we follow trading down as I type.

U.S. equities are off across the board: Dow down 201 points (0.58%), SP500 down 0.77%, SP500 Equal Weight down 0.69%, Nasdaq 100 down 1.30%, Nasdaq Comp down 1.23%, Russell 2000 down 1.48%.

The VIX (SP500 implied volatility) is up 6.06%. VXN (Nasdaq 100 i.v.) is up 5.18%.

Oil futures are down 0.01%, gold's down 2.17%, silver's down 3.67%, copper futures are down 2.60% and the ag complex is 0.95%.

The 10-year treasury is up (yield down) and the dollar is up a big 0.57% (taking commodities [save for oil] for a ride lower).

Led by oil services stocks, Verizon, energy stocks, MP (rare earth miner) and consumer staples stocks -- but dragged notably by silver, gold miners, base metals futures, metals miners and gold -- our core portfolio is off 0.84% to start the session.

As we've expressed, in our view the Fed has literally run out of choices. While I strongly suspect that there's some scary downside volatility across markets to come, ultimately they'll have to sacrifice the dollar if they've any hope of keeping these financial bubbles afloat. Per Alan Greenspan in his book The Age of Turbulence, in the minds of those who steer monetary policy, failure's not an option. Of course that conviction in no way guarantees their "success:"

"In reviewing a policy, I always asked myself the question, What are the costs to the economy if we are wrong? If there is no downside risk, you can try any policy you want. If the cost of failure is potentially very large, you should avoid the policy even if the probability of success is better than fifty-fifty, because you cannot accept the cost of failure."

Have a great day!

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