You know something’s truly amiss when the government reports the economy has just experienced its worst quarter maybe ever and hardly anyone cares. For one thing, it’s old news. There was no surprise factor here, even as real GDP in the US crashed by a little more than a third (annual rate) during 2020’s troubled second three-month period.
Everyone knew it was going to be bad. That was never the real issue. What has always mattered most is what follows it. Will it be a full recovery? As the economy was switched off, can it be so easily, seamlessly switched back on? The true “V” revival.
That was always a long shot, likely impossible. It’s taken a few months for the more enthusiastic of the “V’s” proponents to see this. In fact, the reopening frenzy which got started long before the economic reopening, had already reached its apex around Friday, June 5.
The Dow Jones Industrial Average put in its rebound high the following Monday, June 8. Since, the prior frenzied buying has been replaced by nearly two months of worried angst; enacting a sort of ceiling on the stock index. The S&P 500 has traded similarly, with a slightly higher limit. The NASDAQ? At least it’s still 1999 over there.
Why June 5? That was the day the payroll report for the month of May had been released. This was the one which shocked both Streets, Main and Wall, shattering every analyst projection by coming in at the highest positive number ever (since surpassed by June’s estimate) when it had been expected to remain among economic history’s worst. Not just “V”, perhaps even better.
Such was the mania surrounding the prospects for reopening that even bonds were drawn upward into the fray; yields on the 10-year Treasury leapt above 90 bps in awe of the labor market’s apparently easy resurrection.
Behind much of it, Jay Powell was initially smiling. He had spent the month of March desperately catching up and then the month of April specifically appearing to overdo everything; on anything. There wasn’t a market the Fed wouldn’t pledge to support, no government deficit it wouldn’t want to buy up, and well more than a trillion and a half of newly created, ready-to-go bank reserves bulging from its weekly balance sheet reports for everyone to see.
He'd outpaced Ben Bernanke’s best pace by way more than double.
Not only that, Powell took it another step further, some say too far. Typically, Federal Reserve Chairmen are hard pressed to publicly acknowledge the slightest hint of being reckless. Stoic and staid, they might let you think that on their behalf, as Bernanke once did, but careful never to say or affirm too much.
On Sunday, May 17, however, Chairman Powell appeared on the CBS News program 60 Minutes and…went nuts. Blatantly. Brazenly. There was no fedspeak here, the Greenspan-perfected art of using a lot of words to say practically nothing.
Jay Powell, somewhat out of nowhere, changed the whole ballgame. When CBS reporter Scott Pelley asked if since the crisis in March he had “flooded the system with money” Powell responded emphatically, “Yes. We did. That’s another way to think about it. We did.”
Not only that, he then immediately and directly brought in the legendary printing press, how easy it was to crank the thing up to eleven and just take things Weimar
“We print it digitally. So as a central bank, we have the ability to create money digitally. And we do that by buying Treasury Bills or bonds for other government guaranteed securities. And that actually increases the money supply.”
Two and a half weeks later, Friday May payrolls. It was the perfect storm for our familiar sort of inflationary hysteria.
But, as noted, it didn’t last past the following Monday. While stocks have traded mostly sideways outside of FAANGs, bond yields have dropped across-the-board again (having never really backed up all that much in the first place; hysteria). While bill equivalent yields press back into the single digits, much of the curve’s rates are once more setting record lows or are in reach of them.
To begin with, for all that money printing showmanship where’s the inflation? No one expected that it would show up straight away in the CPI, Powell’s flood of money, but if it was anything other than the torrid, desperate fantasy of a Fed Chairman who realizes he’s in way over his head then it would get picked up, immediately, in TIPS (or swaps).
It didn’t. It still hasn’t.
While inflation breakevens have steadily improved since the crisis, they’re still closer to crisis than inflation, and they’ve moved off the bottom because oil prices have pulled back from the brink of zero and up to around $40 based on massive, likely sustained production cuts (and still the futures curve is in contango). With nominal Treasury yields sliding lower, that move in WTI ended up pushing real TIPS yields to oppressively negatives.
The 10-year “real” yield, for one, sits at a new record low. So, while American consumers may have to pay the somewhat stinging gasoline price that comes with $40 oil, they should not expect any sort of renewed economic cushion to make it more palatable while they do. On the contrary, the level of growth expectations embedded in these TIPS and Treasury prices is indescribably awful.
Any words you might try to use to accurately portray this situation would not have a “v” among them.
What was in that payroll report which seems to have shattered the inflationary magic? Ironically, it was the same thing as in the current GDP report. Whereas this latter was absolutely expected, everyone knew what it was going to be like, after thinking a weekend about May payrolls there really wasn’t anything substantial to them, either. I wrote on that particular Monday:
“Honestly, what did everyone think was going to happen?... All this payroll report confirms is what we already knew – the economy is being reopened. Quite naturally it will lead to millions of Americans heading back to work. You deprive tens of millions of the opportunity to leave their house and attend to their jobs, once allowed they’re going to flood back in.”
They did. Each of the last two labor reports have been the same, one bigger than the next; yet, they tell us little to nothing about what comes next.
And that’s Jay Powell’s job, he thinks. Not to create - on his own - the forces which would shape it, rather to get you to do that work for him. Economic theory posits that expectations are the whole thing, the entire ballgame.
Therefore, Powell didn’t actually change the game when he appeared on 60 Minutes so much as apply a new standard to the same sport. His act wasn’t truly different, this recklessly talking up money printing. The situation is so dire any chance for expectations demanded he take extreme steps. Not in printing legitimate and useful money, which he can’t, in lieu making you think that’s what he’s doing, what he will do and do forever.
And it’s quite predictably falling apart.
Since the bond market has rejected this fantasy, those cheering Powell on have been forced to move on to increasingly tenuous interpretations of other markets.
Gold is skyrocketing – see! There’s the inflation! Except, no, gold has been on its upward trajectory since early October 2018, not mid-March 2020 when that “flood” got started. In fact, gold’s price behavior over the last almost two years near perfectly matches…bonds.
The correlation between yields and gold already makes sense given gold is often defined by the opportunity costs for holding other similar kinds of safety hedges (like bonds). Therefore, the lower yields drop, and the more it looks like they’ll stay lower, the less opportunity cost gets put onto gold and the more easily it can surge higher.
The higher gold goes up, the more that corresponds to yields staying down. Contrary to the mainstream’s assessment, gold isn’t predicting the out-of-control inflationary consequences of reckless money printing. It is being bid up on the growing concern, shared by bonds, that at a time when real monetary policy has been and still is needed all a Federal Reserve Chairman can do is talk, lie, and try to sell a literal fiction.
Which brings us to the dollar. If you haven’t seen the headlines, you aren’t missing anything. The dollar’s crashing, they all say, with the major dollar index, DXY, down to its lowest level in years. By God, Jay Powell’s done it!
That’s how you know this inflation story has truly nothing behind it. The dollar isn’t crashing, it’s not even down, combined with gold and bonds all three remain firmly fixed within the same deflationary camp.
DXY is not the dollar, it’s the euro. To a lesser extent the yen. Whereas the former doesn’t really matter much, especially against the dollar, the latter does and when JPY is on the rise, though that makes the dollar fall in exchange with it, a rising yen signals nothing to do with dollar, money, or global inflation.
We’ve seen this countless times before, the cry of “debasement” and currency wars which rings throughout the financial media. The last time we did this, uniform shrieks in all directions calling it guaranteed, 100% dollar crash, which was February 2020, by the way, I tried to remind and warn people of (recent) history.
The suspiciously short-lived Currency Wars of 2011, courtesy of reckless Ben Bernanke irresponsibly printing to weaken if not destroy the dollar via QE2. Weird, though, how there weren’t similar criticisms of QE3 (and 4).
“But if the Fed was tanking the dollar, why didn’t the dollar tank? You can argue that such wasn’t the goal of US QE, still there must be something wrong with the textbook view. Whether intentional or not, by all established accounts the dollar ‘should’ have fallen and fallen further. That’s why when Minister Mantego showed up on TV [declaring it a currency war] and all over the internet everyone just nodded their heads.”
When Ben Bernanke’s FOMC voted to restart QE in November 2010, officials sitting around the table at that meeting worried quite a bit about it, how they’d be accused of setting a weaker dollar and using it beggaring-thy-neighbors.
“MR. WARSH. Even those who do believe that there are real benefits in terms of net exports from weakening the foreign exchange value of the dollar are hesitant and rightly so to say those words in public venues. They don’t consider that to be politically correct.”
How about just correct? The balance of the discussion was weighing only those two possibilities; undertake QE2, more money printing, and risk the fallout from driving the dollar into the dirt; or, do nothing and let the unusually weak recovery stall even further.
To make matters worse, they expected most if not all economic improvement from QE2 to be generated by that lower dollar value. Textbook devaluation, whether they’d say so in public or not.
“MR. LACKER. It looks to me as if one could say that the main effect of the asset-purchase program on real growth for the U.S. acts through the value of the dollar.”
One of the staff researchers present mildly corrected President Lacker, telling him that not all the calculated benefit was due to the downward dollar just the vast majority; “we decompose the effect as due about two-thirds to the dollar effect, with the remaining one-third being split roughly equally between the lower bond yields and the higher stock values.”
In other words, they see the correlation between a lower dollar and higher realized growth, but it’s plainly obvious, proven time and again, they have no idea what it is that actually moves the dollar one way or the other. For while in November 2010, at the outset of QE2, policymakers expressed their distaste for being called currency warriors they fully expected to be currency warriors.
“MR. WARSH. I think it is risky pool playing in the foreign exchange markets, asking them to do so much of our work when the world’s recovery is resting on this.”
Instead, the dollar would soon shoot upward as a second monetary crisis gripped the eurodollar world, beginning mere months after this FOMC meeting, even after half a trillion more of QE2’s “money printing.”
Part of this framework for anticipated dollar-manipulation also rests on the presumed effects of QE’s bond buying mechanics; that when the central bank buys bonds, this raises their price and lowers the overall yield environment. While they think that stimulus, they also believe that lower yields further lower the dollar by adding lower returns to the market distaste already running away from money printing.
They really have no idea what they are doing. There isn’t a single part of the market/money/economy framework that these people get right; they simply recite passages from ancient textbooks written a very long time ago about a kind of system that hasn’t been relevant in ages.
What happens instead, what keeps happening, is that lower bond yields irrespective of QE correspond to rising dollar environments and both for the same background reason – the global dollar shortage. This monetary squeeze which makes the safest, most liquid instruments highly prized (and priced, thereby that’s what lowers their yields, not central bank bond buying) and pinches the value of the dollar upward – just like what happened in March 2020.
While DXY is down recently, broader dollar indices, like individual currency crosses other than the euro, have barely moved.
When you put those facts into the context of Jay Powell’s alleged flood of money printing, why isn’t the dollar tanking except for its relation to the euro? Like November 2010, going by the textbook, it should have already.
What the dollar is saying, again like the markets for bonds and gold, is simply this: Jay Powell is a fiction writer, only a barely adequate one for engaging the financial media in his purposes. And even it is starting to wonder as we all press on toward August.
As we do, it’s not those prior payroll reports that anyone has on their minds, nor this week’s already-factored GDP collapse. No, it’s the other labor market indications which continue to be alarmingly, historically terrifying. Jobless claims may have bottomed out earlier this month, since turned upward again for two weeks in a row.
What’s most worrisome isn’t just this possible inflection, it’s where this prospective bottom may have already taken shape - still more than double the pre-March record for initial unemployment claims. Near a full quarter of reopening and the economy continues to be devastated by the twin combo of overreaction to COVID and underreaction to GFC2.
Reopening is not recovery, a simple but powerful lesson. It could have been, long shot, but we’re stuck instead with officials who still have no idea what they are doing because no one has ever been honest with the public about what’s been going for a lot more than this year. Dollar, people! As you buckle up for the months ahead, as the consequences of more than a decade of confused, wannabe currency warriors play out in cities across the world, keep that in mind.
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