Powell Says Foreign Buyers Distorting Yield-Curve Readings (Gold Rises On Powell Head Fake As US Dollar Declines)

Like John Belushi from The Blues Brothers, Fed Chair Jerome Powell is saying that the markets lackluster response in terms of bond yields to his “hawkish” announcement yesterday “isn’t his fault.”

(Bloomberg) Federal Reserve boss Jerome Powell appears unperturbed by the fact that longer-term bond yields remain low even as officials lay the ground work for tighter policy and inflation is ticking higher.

While the drop in longer-term rates may be viewed by some as indicative of where so-called terminal rates for U.S. policy might ultimately lie, Powell on Wednesday emphasized the impact of ultra-low yields in places like Japan and Germany in helping to keep them anchored.

“A lot of things go into the long rates and the place I would start is just look at global sovereign yields around the world,” Powell said at a news conference following the Fed’s final scheduled policy meeting for the year, which saw officials ramp up the pace of stimulus withdrawal and boost predictions for rate hikes in 2022. The Fed Chair noted that rates on Japanese and German government bonds are “so much lower” than those on Treasuries and that with currency hedging taken into account American debt provides investors with a higher yield. “I’m not troubled by where the long bond is,” he said.

This stands as something of a contrast to the view expressed back in 2005 by one of Powell’s predecessors. Back then, Fed chief Alan Greenspan described a decline in long-term bond yields even in the face of six policy rate increases as a “conundrum.”

Or it could be that no one REALLY believes that Central Banks will ever cut interest rates, despite surging inflation.

The US Treasury 10-year yield dropped 7 basis points overnight and remains just south of 1.50%. The Eurozone remains below 1% (with Germany at -0.358% and France at -0.009% at the 10-year mark). Japan is at 0.039%. This is what Powell means by low global rates keeping US long-term rates down.

The 10-year Treasury term premium (measured before Powell’s head fake on raising rates) has returned to pre-Biden levels.

Meanwhile, global equities futures are up across the board (well, except for Mexico).

Gold rose on Powell’s “Tomorrow” talk while the US Dollar fell.

The Fed could have raised their target rate if they were REALLY interested in cooling inflation. The Taylor Rule remains at 14.94% while The Fed is stalled at 0.25%. Even if you don’t like the Taylor Rule, it still highlights how ridiculous Fed Stimulypto is.

Well, we do have a government-propelled economic recovery, but at a cost of declining REAL wages thanks to the highest inflation rate in 40 years.

Hold That Tiger! Fed Keeps Rate At 0.25% But Doubles Pace Of Tapering To $30 Billion A Month (3 Rates Hikes Forecast For 2022, 3 In 2023) Dow Rises Over 300 Points

The Fed’s new theme song is “Hold That Tiger” meaning that despite soaring inflation rates, The Fed kept their target rate at 0.25%. Way to really pull a Volcker and raise rates to choke off inflation. … NOT!

However, The Fed doubled the pace of tapering to $30 billion a month. Median forecast shows three rate hikes in 2022, three in 2023.

The reaction? The Dow rose 363 points as of 3:36pm EST and the 10-year Treasury yield rose a measly 1.9 bps as markets celebrate The Fed DOING NOTHING TO CURB INFLATION.

Here is Fed Chair Jerome Powell singing “Tomorrow” from the musical Annie. Since Powell and The Gang love to kick the can down the road.

The Fed Is the Main Inflation Culprit (But Federal Government’s Spending Spree Was The Icing On The Inflation Cake)

There was an interesting op-ed in The Wall Street Journal entitled “The Fed Is the Main Inflation Culprit”.

If price stability is squandered, financial stability is put at risk. If financial stability is lost, the economy is imperiled and the social contract is threatened.

During the past several quarters, U.S. inflation has surged—now running about triple the Federal Reserve’s 2% target. The surge in prices is unlikely to reverse on its own. The longer that prices are unstable, the greater the challenge to the conduct of macroeconomic policy. The last thing the country needs is its third major economic upheaval in a decade and a half.

The consequences of inflation—and the attendant risks—have long been understood. In 1898 economist Knut Wicksell explained: “Changes in the general level of prices have always excited great interest. Obscure in origin, they exert a profound and far-reaching influence on the whole economic and social life of a country.”

I agree with the op-ed, but as Paul Harvey liked to say, “And now for the rest of the story.”

The Federal Reserve is only half of The Federal government “Stimulypto.” Starting in late 2008, The Fed crashed their target rate to 25 basis points and began their quantitative easing (QE) program where The Fed purchased Treasuries and Agency Mortgage-backed Securities (MBS) amongst other assets. Notice in the chart below that QE was adjusted, but never went away and The Fed’s target rate only was increased once before Trump’s election as President, then raised eight times then decreased five times. And no rate increases under Biden. So The Fed scorecard is Obama/Biden: 1 rate increase. Trump: 13 rate changes. And The Fed’s balance sheet has gone bananas since the COVID outbreak.

Inflation, as measured by the Consumer Price Index (CPI) didn’t really take-off until March 2021 as a result of STIMULYPTO (excessive monetary stimulus + Federal government spending).

Here is the Federal government spending surge that helped generate the highest inflation in a generation.

So while the op-ed author blames inflation solely on The Federal Reserve, The Fed was unable to achieve its inflation goal for much of the post-financial crisis period. It was the double whammy of Fed monetary stimulus + Federal government stimulus (spending) that pushed inflation to 6.8%.

Following Paul Harvey’s “The Rest of the Story,” I choose baseball player Whammy Douglas to represent the double whammy of Fed + Fed government stimulus to produce inflation. THAT is the rest of the story.

Throw in the Biden Administration’s war on fossil fuels (driving up energy costs by over 50%) and we have a TRIPLE WHAMMY!!

The WSJ op-ed author was focused only blaming The Fed. Sorry, it was a Double Whammy.

Bond Traders Stare at Worst Real Returns Since Paul Volcker Era Thanks To Inflation (The Fed’s Famous Chili!)

Inflation-adjusted return of Treasuries fell to lowest since the 1980s. For bond investors, this is their version of Kevin’s Famous Chili from The Office! Or The Fed’s Famous Chili!

(Bloomberg) — Treasury investors are losing more money than they have in four decades, once inflation is taken into account. And if markets are right, they’re unlikely to come out ahead for years.

The federal government’s debt has already lost about 2% outright over the past year as the Federal Reserve started removing pandemic-era stimulus from the economy and inched closer toward raising interest rates. But on top of that, the consumer price index has surged 6.8%, putting investors even deeper in the hole.

Taken together, that’s resulting in the worst real returns — or those adjusted for inflation — since the early 1980s, when then Fed Chair Paul Volcker was in the midst of fighting a wage-price spiral. What’s more, the dynamic isn’t expected to change: The bond market is projecting that 10-year Treasury yields will hold below the inflation rate for the next decade, meaning any investment income will be more than wiped out by the rising cost of living.

If we look at the REAL 10-year Treasury yield and REAL Fed Funds Target Rate, they are both negative.

Let’s see if Powell spills his famous chili on Wednesday at 2:00PM EST. The Fed keeps saying they are serious about controlling inflation, just like Kevin Malone.

Inflation Near 40-Year High Shocks Americans, Spooks Washington (As Largest Wealth Redistribution In US History Occurs … Towards The 1%)

The U.S. is poised to enter Year Three of the pandemic with both a booming economy and a still-mutating virus. But for Washington and Wall Street, one Covid aftershock is starting to eclipse almost everything else.

Already-hot inflation is forecast to climb even further when November data comes out on Friday, to 6.8%. That would be the highest rate since Jimmy Carter was president in the early 1980s — and in the lifetimes of most Americans.

And the CPI change since last year, according to the Federal Reserve of St Louis FRED is a staggering 16.262%.

And with U.S. Jobless Claims plunge to 52-year low, its about time that The Fed begins removing the humongous monetary stimulus.

After all, largely thanks to Federal Reserve policies, we have seen the greatest wealth redistribution in US history … to the top 1%.

And away from the bottom 50%.

Way to go Federal Reserve!

UMich Buying Conditions For Housing PLUNGES To 63 Due To Outrageous Home Price Growth & Lessons From The Yellen Pivot

Just look at this chart of the University of Michigan Buying Conditions For Houses index. It was positive (meaning above 100) until shortly after COVID struck and The Federal Reserve rode to the rescue. National home price growth was already at 4.57% YoY in March 2020, then ballooned to 19.51% YoY at the last reading.

Here is the same chart with the broader M2 Money stock and The Fed’s Balance sheet. Same results, just not as dramatic as M1.

We will soon find out if The Federal Reserve will announce a rate hike or taper news. They are likely to confirm tapering, particularly if they believe that tapering won’t roil markets. After all, then Fed Chair Janet Yellen and the FOMC decided to let the Fed’s balance sheet taper (white line) while, at the same time, increasing the Fed’s target rate (yellow line). The S&P 500 index rose 9.5% over the taper/rate increase period of 12/29/2017 to 8/30/2019.

But since Stimulypto (2/28/2020 to 11/30/2021), the Fed’s balance sheet doubled+ from $4,158,637 to $8,681,771. And The Fed Funds Target Rate (UB) immediately fell from 1.75% in February 2020 to 0.25% in March 2020 … and has stayed there ever since. The S&P 500 index rose 54.6% over this Stimulypto period.

But The Fed’s upcoming decision on December 15, 2021 may be a Yellen-pivot (taper balance sheet, but raise The Fed Funds Target rate). But, then again, maybe not. The Fed is getting really bad about forward guidance and choose instead to surprise us. Hence, this is why an a-political rule is preferred (such as the Taylor Rule).

Unfortunately, the Taylor Rule infers a Fed Funds Target rate of 15.50% (using CPI YoY running at 6.20% YoY. If The Fed raises their target rate by 25-50 basis points at the December 15th meeting, color me surprised.

So, the Powell Pivot may just be the Yellen Pivot after all.

S&P 500 REAL Earnings Yield At -2.33% While REAL Wage Growth At -1.43% (REAL 30Y Mortgage Rate At -3.11%) “Weird, Wacky Stuff!”

As Parks and Recreation’s Martin Housely said, “Weird, wacky stuff.”

We now have the S&P 500 REAL earnings yield at -2.33%.

REAL US average hourly wage growth is at -1.43% and the REAL 30-year mortgage rate is at -3.11%.

The cause of this weird and wacky economic stuff? How about the surge in M1 Money and The Fed Balance Sheet?

I can almost see Fed Chair Jerome Powell imitating Martin Housely and saying “Weird, wacky stuff” in his testimony before Congress.

US Unit Labor Costs SOAR 9.60% QoQ As Labor Productivity DECLINES 5.20% QoQ (Worst Since 1960)

If this what the Biden Administration had in mind? Soaring labor costs at the same time that labor productivity is falling to its lowest level since 1960?

Powell and the Gang’s monetary approach doesn’t seem to be working for the labor market …

But is working extremely well for asset prices.

Wall Street parties while Main Street suffers worst decline in productivity since 1960.

Margin Accounts at Brokers and Dealers EXPLODES As CMBX Remains 30.5% Below Pre-Covid Levels (What Money Printing CAN’T Fix)

As we are all painfully aware, The Federal Reserve went on a 2nd money printing spree to allegedly stave-off the economic impacts of the COVID outbreak in March 2020. The first money printing spree took place in late 2008 as The Fed tried to stave-off the economic impacts of the housing bubble burst of 2008 and the ensuing financial crisis.

But for now, we have this horrifying chart showing the exploding margin accounts at security brokers and dealers (not, not the Walter White-type dealers, but Wall Street dealers). Notice the 400% surge in M1 Money stock after COVID struck.

Of course, the soaring stock market is feeding the margin loop, encouraged by The Fed. Check out the Shiller Cyclically Adjusted Price Earnings (CAPE) ratio after The Fed’s M1 printing storm.

What can’t money printing fix? How about CMBS prices (or CMBX BBB- S6 prices … down 30.5% since just before COVID struck.

Let’s see if The Fed sucks the 400% growth back to zero.

REAL Average Hourly Earnings Growth Falls To -1.378% YoY In November Jobs Report (Jobs Added Missed BIG At Only 210K, New Taylor Rule Estimate Is 15.50%)

Treasury Secretary Janet Yellen said yesterday that “It’s Fed’s Job to Avoid Any Wage-Price Spiral.” Well, The Fed is helping to avoid a wage increase in real terms, since the November jobs report revealed that REAL US Average Hourly Earnings growth YoY fell to -1.378%. In other words, inflation is greater than hourly earnings.

And in other jobs related news, nonfarm payrolls rose by only 210k versus expectations of 550k jobs to be added. Even NOMINAL hourly earnings growth (4.8% YoY) was less than expected (5.0%).

Labor force participation rose a bit to 61.8%, still well below the pre-COVID levels of 63.4% in January 2020.

The U-3 unemployment fell to 7.8%. Still higher than the pre-COVID rate of 7.0% in February 2020, but getting close! As for what this means for The Fed, the new target rate implied by the Taylor Rule is 15.50%.

After this lousy jobs report, 10-year Treasury yields dropped … like Biden’s approval ratings.

The dance number where The Fed keeps their target rate at 25 basis points while the Taylor Rule implies a target rate of 15.50% is the Yellen Boogie. By Powell and the Gang.