March 11, 5:00 pm EST

We ended last week with a 4.4% plunge in Chinese stocks.  What followed, Friday morning (EST time), was an announcement that the Fed Chair (Jerome Powell) would be appearing on an exclusive 60 Minutes sit down interview Sunday night.

This is a rare occurrence, that the Fed Chair does a mainstream media interview/Q&A.  These Q&A’s are typically done in Congressional hearings, following Fed meetings or at select economic conferences.  The common theme:  He speaks economics and policy to economic and policy practitioners.

With that, this interview with 60 Minutes was clearly a desire to speak to the broader public.  In part, it was a response to the growing risks of a confidence shock (given the December stock market decline, Brexit drama and China/U.S. trade uncertainty).  It was an opportunity to tell the public that the economy is doing well, despite the media’s doom and gloom stories.

Also, in part, it was an opportunity to tell the public that the Fed is there to defend against shocks and panics, and that they won’t be swayed by politics.

Powell was also specifically asked about a few of the cherry picked data points the financial media has been parading around in recent days.  As we discussed Friday, without context, some of the data can sound ominous.  He added context, including for the  dip in retail sales from December.  Of course the retail sales hit was the result in the knee-jerk swing in confidence that comes with the December plunge in the stock market.  He said they would be watching the January number closely.  The January number today, indeed, was strong.

That (the interview and the confirmation of the retail sales data) was a catalyst for a big bounceback in stocks today.

Powell is following the script of the Ben Bernanke.  When Bernanke was directing the Fed through the storm of the financial crisis, he (and the Fed) were being killed in the media.  And the media set the tone for global leaders to take shots at the Fed too.  So, Bernanke took to 60 minutes to speak directly to the people – to set the record straight.  That interview set the bottom in the stock market — and it turned the tide in global sentiment.

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March 9, 2017,5:15pm EST                                                                                                   Invest Alongside Billionaires For $297/Qtr

With today marking eight years from the bottom in the stock market, let’s talk about why it bottomed. And then take look at the run up in stocks since 2008.

First, why did stocks (the S&P 500) turn at 666 on March 9th, 2009?

Policymakers were scrambling to stop the bleeding in banks, trying to unfreeze global credit, and stop the dominos from continuing to fall.

The Fed had already launched a program a few months earlier to buy up mortgage back securities, to push down mortgage rates and stop the implosion in housing. Global central banks had already slashed interest rates in attempt to stimulate the economy. The U.S. had announced a $787 fiscal stimulus package a few weeks earlier. And then finance ministers and central bankers from the top 20 countries in the world met in London on March 14.

Here’s what they said in the opening of their communique: “We have taken decisive, coordinated and comprehensive action to boost demand and jobs, and are prepared to take whatever action is necessary until growth is restored.”

The key words here are “coordinated” and “whatever action is necessary.”

The Fed met four days later and rolled out bigger purchases of mortgages, and for the first time announced they would be buying government debt. This was full bore QE. And it was with the full support of global counterparts, which later followed that lead.

What wasn’t known to that point, was to what extent policymakers were willing to intervene to avert disaster. This statement by G20 finance heads and the action by the Fed let it be known that all options are on the table (devaluation, monetization, etc) — and they were all-in and all together in the fight to stave off an apocalypse. With that, the asset reflation period started. And it started with QE.

With that said, let’s take a look at the chart on stocks and the impact QE has had along the way.

The baton has now been passed to fiscal stimulus in the U.S.  But we have the benefit of QE still full bore in Europe and Japan. The question is, can that continue to anchor interest rates in the U.S. and keep that variable from stifling the impact of growth policies.

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March 6, 2017, 4:00pm EST

It’s jobs week.  Thanks to 1) Trump’s reminder to the country in his address to Congress last week that big economic stimulus was coming, and 2) Yellen’s remarks last week that all but promised a rate hike this month, the market is about as close to fully pricing in a rate hike as possible for March 15.

The last data point for everyone to obsess about going into next week’s Fed meeting will be this Friday’s jobs report.

But as I’ve said for quite a while, the jobs data has been good enough in the Fed’s eyes for quite some time. Nonetheless, they’ve had many, many balks along the path of normalizing rates over the past couple of years. Here’s a look at a chart of the benchmark payrolls data we’ll be seeing Friday.

You can see in this chart, the twelve-month moving average is 195k.  The three-month moving average is 182k. The six-month moving average is 182k. This is all fairly consistent with historical/pre-crisis levels.

So the numbers have been solid for quite some time, even meeting and exceeding the Fed’s targets, especially when it comes to the unemployment rate (4.7% last).  However, when the Fed’s targets have been met, the Fed has moved the goal posts.  When those goal posts were then exceeded, the Fed found new excuses to justify their decisions to avoid the path of aggressive hikes/normalization of rates that they had guided.

Among those excuses:  When jobs were trending at 200k and unemployment breached 5%, the Fed started to acknowledge underemployment.  Then the lack of wage growth became the focus.  Then it was macro issues.  To name a few:  It’s been soft Chinese economic data, a Chinese currency move, Russian geopolitical tensions, collapsing oil prices, Brexit and weak productivity.
And just prior to the election last year, the Fed became, confusingly, less optimistic about the U.S. economic outlook, which was the justification to ratchet down the aggressive projected path for rates.

I suspected last year, when they did this that they were making a strategic pivot, to set expectations for a much easier path for rates, in hopes to keep people spending, borrowing and investing — instead of promoting a tighter path, which proved for the better part of two years (prior to the election) to create the opposite effect.

Remember, Bernanke (the former Fed Chair) even wrote a public piece on this last August, criticizing the Fed for being too optimistic in its projections for the path of interest rates.  By showing the market/the world an expectation that rates will be dramatically higher in the coming months, quarters and years, Bernanke argued in his post that this “guidance” has had the opposite of the desired effect – it’s softened the economy.

A month later, in September, in Yellen’s post-FOMC press conference, she said this in response to why they didn’t raise rates:  “the decision not to raise rates today and to wait for some further evidence that we’re continuing on this course is largely based on the judgment that we’re not seeing evidence that the economy is overheating.”  Safe to argue, the economy isn’t overheating, still.

Again, as I said on Friday, the only difference between now and then, is the prospects of major fiscal stimulus, which is precisely what the Fed claims to be ignoring/leaving out of their forecasts – a believe it when I see it approach, allegedly.

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February 13, 2017, 4:00pm EST

Today we heard from Janet Yellen in the first part of her semi-annual testimony to Congress.  She gave prepared remarks to the Senate today and took questions.  Tomorrow it will be the House.  The prepared statement will be the same, with maybe a few different questions.

Remember, just four months ago, the most important actor in the global economy was the Fed.  Central banks were in control (as they have been for the better part of 10 years), with the Fed leading the way.

The Fed was the ultimate puppet master.  By keeping rates ultra-low and standing ready to act against anything that might destabilize the global economy and threaten to kill the dangerously slow recovery, they (along with the help other major central banks) restored confidence, and created the stability and incentives to drive hiring, investing and spending — which created economic recovery.

When Greece bubbled up again, when oil threatened to shake the financial system, when China’s slowdown created uncertainty, central banks were quick to step in with more easing, bigger QE, promises of low rates for a very long time, etc..  And in some cases, they outright intervened, like when the ECB averted disaster in Italy and Spain by promising to buy unlimited amounts of Italian and Spanish government bonds to stop speculators from inciting a bond market collapse and a collapse of the euro and European Union.

This dynamic of central bank activism has changed.  The Fed, and central bank intervention in general, is no longer the only game in town. We have fiscal stimulus coming and structural change underway that has the chance to finally mend the decade long slump of the global economy.  That’s why today’s speech by the Fed Chair was no longer the biggest event of the week — not even the day.

The scripts has flipped. Where the Fed had been driver of recovery, they now have become the threat to recovery. So the interest in Fedwatching today is only to the extent that they may screw things up.

Moving too fast on interest rate hikes has the potential weaken or even undo the gains that stand to come from the pro-growth policies efforts from the new administration.

Remember, the Fed told us in December that they projected THREE hikes this year.  But keep in mind, they projected FOUR in December of 2015, for 2016, and we only got one. And that was only AFTER the election, and the swing in sentiment regarding the prospects of pro-growth policies.

Remember, Bernanke himself has criticized the Fed for stalling momentum in the recovery by showing too much tightening (i.e. over optimism) in their forecasts.  And he argued that the Fed should give the economy some room to run and sustain momentum, fighting inflation from behind.

On that note, the Fed has now witnessed the bumpy path that the new administration is dealing with, and will be traveling, in implementing policy.  I would think they would be less aggressive now in their view on rate hikes UNTIL they see evidence of policy execution, and a lot more evidence in the data.  Let’s hope that’s the case.

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November 29, 2016, 5:15pm EST


Yesterday I talked about how an OPEC cut on oil production would/should accelerate the Fed’s plan for interest rate hikes next year.

Interestingly, the former Fed Chair himself, Ben Bernanke, wrote a post today on the internet talking about the Fed’s rate path and its quarterly projections (which we looked at yesterday).

Like his post in August, where he interpreted a shift in the Fed’s communications strategy for us, the media, which is always following the latest shiny object, didn’t pick up on it then, didn’t pick up on his message about the Bank of Japan’s actions in September, and has barely reported on his new post today (to this point).

When Bernanke speaks, for anyone that cares about the direction of markets, interest rates and the economy — we should all be listening.

Let’s talk about some of the nuggets Bernanke has offered in recent months, to those that are listening, through simple blog posts.  And then we’ll look at what he said today.

Remember, this is the man with the most intimate knowledge of where the world has been over the past decade, what it’s vulnerable to, and what the probable outcomes look like for the global economy.  He advises one of the biggest hedge funds in the world, the biggest bond fund in the world and one of the most important central banks in the world (the BOJ), and clearly still has a lot of influence at the Fed.

Back in August he wrote a piece criticizing the Fed for being too optimistic in its projections for the path of interest rates. He said that the Fed’s forward guidance of the past two years has led to a tightening in financial conditions, which has led to weaker growth, lower market interest rates and lower inflation. In plain English, consumers and businesses start playing defense if they think rates are on course to be dramatically higher, and that leads to lower inflation and lower growth. The opposite of the Fed’s desired outcome.

With that, Bernanke thought they should be taking the opposite approach, and suggested it may already be underway at the Fed (i.e. they should underestimate future growth and the rate path, and therefore possibly stimulate economic activity with that message).

It just so happens that Yellen has been speaking from this script ever since.  They’ve ratcheted down expectations of the rate path, and in her more recent comments she’s said the Fed should let the economy run hot (to give it some momentum without bridling it with higher rates).

Then in September, after the BOJ surprised with some new wrinkles in their QE plan, Bernanke wrote a post emphasizing the importance of their new target of a zero yield on their 10 year government bond. The media and markets gave the BOJ’s move little attention.  It was as if Bernanke was acting as the communications director for the BOJ.

He posted that day saying that the BOJ’s new policy moves were effectively a bigger QE program. Instead of telling us the size of purchase, they’re telling us the price on which they will either or buy or sell to maintain. He said, if the market decides to dump Japanese government bonds, the BOJ could end up buying more (maybe a lot more) than their current 80 trillion yen a year.

Bernanke also called the move to peg rates, a stealth monetary financing of government spending (which can be a stealth debt monetization).  The market has indeed pushed bond prices lower since, which has pushed yields back above zero, and as Bernanke suggested, the BOJ is now in unlimited QE mode (buying unlimited amounts of bonds as long as the 10 year yield remains above a zero interest rate). That’s two for two for Bernanke interpreting for us, what looks like a complicated policy environment.

So what did he talk about today?  Today he criticized Fed members for sending confusing messages about monetary policy through their frequent speeches and interviews that take place between Fed meetings. But most importantly, he seemed to be setting the table for another 180 from the Fed on their economic projections at their December meeting.

Remember, they went from forecasting four hikes for 2016, to dialing it back dramatically just three months into the year.  Now, with the backdrop for a $1 trillion fiscal stimulus package finally coming down the pike, to relieve monetary policy, the outlook has changed for markets, and likely the Fed as well.

With that, Bernanke seems to be trying to give everyone a little heads up, to reduce the shock that may come from seeing a Fed path, in it’s coming December projections, that may/will likely show expectations of more aggressive rate hikes next year — perhaps projecting four hikes again for the year ahead (as they did into the close of last year).

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November 17, 2016, 4:30pm EST

As the Trump rally continues across U.S. stocks, the dollar, interest rates and commodities, there are some related stories unfolding in other key markets I want to discuss today.

The Fed:  Janet Yellen was on Capitol Hill today talking to Congress. As suspected, she continues to build expectations for a December rate hike (which is nearly 100% priced in now in the markets).  And she did admit that the economic policy plans of the Trump administration could alter their views on inflation — but only “as it (policy) comes.” I think it’s safe to say the Fed will be moving rates up at a quicker pace than the thought just a month ago.  But also remember, from Bernanke’s suggestion in August, Yellen has said that she thinks it’s best to be behind the curve a bit on inflation — i.e. let the economy run hotter than they would normally allow to ensure the economic rut is left in the rear view mirror. That Fed viewpoint should support the momentum of a big spending package.

The euro:  The euro has been falling sharply since the Trump win, for two reasons.  First, the dollar has been broadly strong, which on a relative basis makes the euro weaker (in dollar terms).  Secondly, the vote for change in the America (like in the UK and in Greece, last year) is a threat to the euro zone, the European Union and the euro currency.  With that, we have a referendum in Italy coming December 4th, and an election in France next year, that could follow the theme of the past year — voting against the establishment. That vote could re-start the clock on the end of the euro experiment.  And that would be very dangerous for the global financial system and the global economy. The government bond markets would be where the threat materializes in the event of more political instability in Europe, but we’ve already seen some of this movie before.  And that’s why the ECB came to the rescue in 2012 and vowed to do whatever it takes to save the euro (i.e. they threatened to buy unlimited amounts of government bonds in troubled countries to keep interest rates in check and therefore those countries solvent).  With that, the events ahead are less unpredictable than some may think.

The Chinese yuan:  As we know, China’s currency is high on the priority list of the Trump administrations agenda.  The Chinese have continued to methodically weaken their currency following the U.S. elections, moving it lower 10 consecutive days to an eight year low.  This has been the trend of the past two years, aggressively reversing course on the nine years of concessions they’ve made.  This looks like it sets up for a showdown with the Trump administration, but as history shows, they tend to take their opportunities, weakening now, so they can strengthen it later heading into discussions with a new U.S. government.  Still, in the near term, a weaker yuan looked like a positive influence for Chinese stocks just months ago — now it looks more threatening, given the geopolitical risks of trade tensions.

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September 21, 2016, 4:40pm EST

Yesterday we talked about the two big central bank events in focus today.  Given that the Bank of Japan had an unusual opportunity to decide on policy before the Fed (first at bat this week), I thought the BOJ could steal the show.
Indeed, the BOJ acted.  The Fed stood pat.  But thus far, the market response has been fairly muted – not exactly a show stealing response.  But as we’ve discussed, two key hammers for the BOJ in achieving a turnaround in inflation and the Japanese economy are: 1) a weaker yen, and 2) higher Japanese stocks.

Their latest tweaks should help swing those hammers.

Bernanke wrote a blog post today with his analysis on the moves in Japan.  Given he’s met with/advised the BOJ over the past few months, everyone should be perking up to hear his reaction.

Let’s talk about the moves from the BOJ …

One might think that the easy, winning headline for the BOJ (to influence stocks and the yen) would be an increase in the size of its QE program.  They kicked off in 2013 announcing purchases of 60 for 70 trillion yen ($800 billion) a year.  They upped the ante to 80 trillion yen in October of 2014. On that October announcement, Japanese stocks took off and the yen plunged – two highly desirable outcomes for the BOJ.

But all central bank credibility is in jeopardy at this stage in the global economic recovery.  Going back to the well of bigger asset purchases could be dangerous if the market votes heavily against it by buying yen and selling Japanese stocks.  After all, following three years of big asset purchases, the BOJ has failed to reach its inflation and economic objectives.

They didn’t take that road (the explicit bigger QE headline).  Instead, the BOJ had two big tweaks to its program.  First, they announced that they want to control the 10-year government bond yield.  They want to peg it at zero.

What does this accomplish?  Bernanke says this is effectively QE.  Instead of telling us the size of purchase, they’re telling us the price on which they will either or buy or sell to maintain.  If the market decides to dump JGB’s, the BOJ could end up buying more (maybe a lot more) than their current 80 trillion yen a year. Bernanke also calls the move to peg rates, a stealth monetary financing of government spending (which can be a stealth debt monetization).

Secondly, the BOJ said today that they want to overshoot their 2% inflation target, which Bernanke argues allows them to execute on their plans until inflation is sustainable.

It all looks like a massive devaluation of the yen scenario plays well with these policy moves in Japan, both as a response to these policies, and a complement to these policies (self-reinforcing).  Though the initial response in the currency markets has been a stronger yen.

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