Thursday, September 9, 2021

Morning Note: At the Mercy of Markets

In his morning note economist Peter Boockvar suggests the following of the Fed:

"...every single Fed member needs to ask themselves what is the point of QE at this point? Some will say we need to keep interest rates low because growth is moderating but do the two most interest rate sensitive areas of the US economy, housing and auto’s, need more juicing of the demand side especially when there is so little supply?"

A little later he quotes fellow economist and former treasury secretary Larry Summers:

“The Fed is running QE at current levels not because anyone has analyzed that as appropriate given current conditions. Rather, there is a felt need to maintain credibility given previous commitments and a reluctance to accept the immediate pain and dislocation associated with changing course, coupled with faith in the ability to manage the situation down the road.”

While I sympathize with both, Summers nailed it with:

"...a reluctance to accept the immediate pain and dislocation associated with changing course.”

Although I disagree with the notion that they have "faith in the ability to manage the situation down the road."

I believe they're utterly panicked and want to kick the can way farther "down the road."

Indisputably, if indeed actions speak louder than words, while there will be the obligatory "tapering" of the pace of monthly bond purchases, well, like I said yesterday:

"...should the Fed indeed implement the tools they proclaim they have to quell inflationary forces, well, overwhelming probabilities point toward an epic bursting of what we'll deem are right here historic equity and debt bubbles.

Hence, tapering of bond purchases notwithstanding, there's nothing consequential, in terms of a Fed-induced tightening of financial conditions, coming down the pike.

Now, that's not to suggest that the market won't deliver notable tremors upon the Fed announcing a tapering timeline, it's just that there's no course they'll embark upon that isn't subject to immediate reversal at the mere sign of a serious market meltdown."

Bottom line; by their own doing, the Fed is utterly at the mercy of financial markets... 

Asian equities were mixed overnight, with 9 of the 16 markets we track closing higher.

Europe's seeing a bull/bear battle as well this morning, with 10 of the 19 bourses we follow in the red as I type.

U.S. stocks, however, are green to start the session: Dow up 140 points (0.40%), SP500 up 0.24%, SP500 Equal Weight up 0.37%, Nasdaq 100 up 0.18%, Nasdaq Comp up 0.30%, Russell 2000 up 0.53%.

The VIX sits at 17.32, down 3.56%.

Oil futures are down 0.07%, gold's up 0.05%, silver's up 0.18%, copper futures are up 1.30% and the ag complex is down 0.21%.

The 10-year treasury is up (yield down) and the dollar is down 0.07%.

Led by ALB (lithium miner), oil services stocks, MP (rare earth miner), base metals futures and bank stocks -- but dragged by uranium miners, gold miners, Verizon, utilities and consumer staples stocks -- our core portfolio is up 0.25% to start the day.

As I continue to stress here on the blog, while present history rhymes a bit with the 1960s, and to some degree one could argue with the 70s, we believe the 1940s represent history's best rendition of the present setup when we're talking central bank constraints.

Stephanie Kelton, in her controversial book on modern monetary theory (a topic every macro actor, agree with the theory or not, needs to get his/her head around, as it, to a point (the point where inflation becomes unanchored), justifies what most of us would deem government profligacy) The Deficit Myth points to that 1940s analog:

"In spite of what most economists say, there’s simply no preordained relationship between fiscal deficits and interest rates. If the central bank is committed to holding rates in place or managing them lower, then fiscal deficits can’t force them to rise as the conventional crowding-out story imagines. A little history will prove the point.
From 1942 until 1947, the Federal Reserve—at the behest of the Treasury Department—actively managed the government’s borrowing costs. Even as spending to fight World War II drove the federal deficit to more than 25 percent of GDP in 1943, interest rates trended lower. That’s because the Fed pegged the T-bill rate at 0.375 percent and held the rate on twenty-five-year bonds at 2.5 percent. As MMT economist L. Randall Wray put it, “the government can ‘borrow’ (issue bonds to the public) at any interest rate the central bank chooses to enforce."

Have a great day!

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