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Boon for Bitcoin, Donald Trump as Ex-Fed Official Pushes to Tax Savers

Boon for Bitcoin, Donald Trump as Ex-Fed Official Pushes to Tax Savers

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Despite never having done so, the Fed may have no choice but to implement negative rates as soon as next week, argues Narayana Kocherlakota.

The United States Federal Reserve could be the next central bank to take up previously unthinkable negative interest rates.

That was the opinion of the ex-president of the Minneapolis Fed, who on April 24 argued that interest rates, already at lows of 0.25%, should fall further — even if they cannot.

Kocherlakota: Fed “should” fight recession with negative rates

“Unprecedented situations require unprecedented actions,” Narayana Kocherlakota wrote for Bloomberg

That’s why the U.S. Federal Reserve should fight a rapidly deepening recession by taking interest rates below zero for the first time ever.

Negative rates essentially mean that banks must pay to hold their deposits, passing on the costs to clients. The phenomenon is already at work in Europe, while Kocherlakota foresees U.S. institutions swallowing the pain instead of hoarding money as cash.

“...Economists now recognize that doesn’t happen, because it’s costly to store billions (or trillions) of dollars of paper currency safely,” he continued.

President Donald Trump has repeatedly voiced his support for lower rates, last year directly criticizing Fed Chair Jerome Powell for failing to make cuts dramatic enough. Now, he may finally get his wish. 

Fed interest rate 60-year chart

Fed interest rate 60-year chart. Source: Macrotrends

“Does E = mc2 any longer?”

For proponents of Bitcoin as sound money, however, such decisions are causing increasing alarm

Negative rates and negative commodity prices, combined with unprecedented government spending, creates a paradoxical situation which many economists throughout the past century have concluded is unsustainable.

As RT hosts Max Keiser and Stacy Herbert explained in the latest edition of their Keiser Report financial news show, negative rates equate to time costing nothing.

“When we got to negative interest rates, when time had no value, that was one thing,” Herbert said.

“...Now we have the negative cost of energy, so does E = mc2 any longer?”

Earlier, Cointelegraph reported on criticism from ex-presidential candidate Ron Paul, who says that the Fed’s model has already fallen apart.

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Spread & Containment

Will Powell Pivot? Don’t Count On It

Stocks are rallying on hopes that Jerome Powell and the Fed will stop increasing interest rates this fall, pivot, and start reducing them next year. For…

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Stocks are rallying on hopes that Jerome Powell and the Fed will stop increasing interest rates this fall, pivot, and start reducing them next year. For fear of missing out on the next great bull run, many investors are blindly buying into this new Powell pivot narrative.

What these investors fail to realize is the Fed has a problem. Inflation is raging, the likes of which the Fed hasn’t dealt with since Jerome Powell earned his law degree from Georgetown University in 1979.  

Despite inflation, markets seem to assume that today’s Fed has the same mindset as the 1990-2021 Fed. The old Fed would have stopped raising rates when stocks fell 20% and certainly on the second consecutive negative GDP print. The current Fed seems to want to keep raising rates and reducing its balance sheet (QT).

The market-friendly Fed we grew accustomed to over the last few decades may not be driving the ship anymore. Yesterday’s investment strategies may prove flawed if a new inflation-minded Fed is at the wheel.

Of course, you can ignore the realities of today’s high inflation and take Jim Cramer’s ever-bullish advice.

When the Fed gets out of the way, you have a real window and you’ve got to jump through it. … When a recession comes, the Fed has the good sense to stop raising rates,” the “Mad Money” host said. “And that pause means you’ve got to buy stocks.

Shifting Market Expectations

On June 10, 2022, the Fed Funds Futures markets implied the Fed would raise the Fed Funds rate to 3.20% in January 2023 and to 3.65% by July 2023. Such suggests the Fed would raise rates by almost 50bps between January and July.

Now the market implies Fed Funds will be 3.59% in January, up .40% in the last two months. However, the market implies July Fed Funds will be 3.52%, or .13% less than its January expectations. The market is pricing in a rate reduction between January and July.

The graph below highlights the recent shift in market expectations over the last two months.

The graph below from the Daily Shot shows compares the market’s implied expectations for Fed Funds (black) versus the Fed’s expectations. Each blue dot represents where each Fed member thinks Fed Funds will be at each year-end. The market underestimates the Fed’s resolve to increase interest rates by about 1%.

Short Term Inflation Projections

The biggest flaw with pricing in predicting a stall and Powell pivot in the near term is the possible trajectory of inflation. The graph below shows annual CPI rates based on three conservative monthly inflation data assumptions.

If monthly inflation is zero for the remainder of 2022, which is highly unlikely, CPI will only fall to 5.43%. Yes, that is much better than today’s 9.1%, but it is still well above the Fed’s 2.0% target. The other more likely scenarios are too high to allow the Fed to halt its fight against inflation.

cpi inflation

Inflation on its own, even in a rosy scenario, is not likely to get Powell to pivot. However, economic weakness, deteriorating labor markets, or financial instability could change his mind.

Recession, Labor, and Financial Instability

GDP just printed two negative quarters in a row. Some economists call that a recession. The NBER, the official determiner of recessions, also considers the health of the labor markets in their recession decision-making. 

The graph below shows the unemployment rate (blue), recessions (gray), and the number of months the unemployment rate troughed (red) before each recession. Since 1950 there have been eleven recessions. On average, the unemployment rate bottoms 2.5 months before an official recession declaration by the NBER. In seven of the eleven instances, the unemployment rate started rising one or two months before a recession.

unemployment and recession

The unemployment rate may start ticking up shortly, but consider it is presently at a historically low level. At 3.5%, it is well below the 6.2% average of the last 50 years. Of the 630 monthly jobs reports since 1970, there are only three other instances where the unemployment rate dipped to 3.5%. There are zero instances since 1970 below 3.5%!

Despite some recent signs of weakness, the labor market is historically tight. For example, job openings slipped from 11.85 million in March to 10.70 in June. However, as we show below, it remains well above historical norms.

jobs employment recession

A tight labor market that can lead to higher inflation via a price-wage spiral is of concern for the Fed. Such fear gives the Fed ample reason to keep tightening rates even if the labor markets weaken. For more on price-wage spirals, please read our article Persistent Inflation Scares the Fed.

Financial Stability

Besides economic deterioration or labor market troubles, financial instability might cause Jerome Powell to pivot. While there were some growing signs of financial instability in the spring, those warnings have dissipated.  

For example, the Fed pays close attention to the yield spread between corporate bonds and Treasury bonds (OAS) for signs of instability. They pay particular attention to yield spreads of junk-rated corporate debt as they are more volatile than investment-grade paper and often are the first assets to show signs of problems.

The graph below plots the daily intersections of investment grade (BBB) OAS and junk (BB) OAS since 1996. As shown, the OAS on junk-rated debt is almost 3% below what should be expected based on the robust correlation between the two yield spreads. Corporate debt markets are showing no signs of instability!

corporate bonds financial stability

Stocks, on the other hand, are lower this year. The S&P 500 is down about 15% year to date. However, it is still up about 25% since the pandemic started. More importantly, valuations have fallen but are still well above historical averages. So, while stock prices are down, there are few signs of equity market instability. In fact, the recent rally is starting to elicit FOMO behaviors so often seen in speculative bullish runs.

Declining yields, tightening yield spreads, and rising asset prices are inflationary. If anything, recent market stability gives the Fed a reason to keep raising rates. Ex-New York Fed President Bill Dudley recently commented that market speculation about a Fed pivot is overdone and counterproductive to the Fed’s efforts to bring down inflation.

What Does the Fed Think?

The following quotes and headlines have all come out since the late July 2022 Fed meeting. They all point to a Fed with no intent to stall or pivot despite its effect on jobs and the economy.

  • *KASHKARI: 2023 RATE CUTS SEEM LIKE `VERY UNLIKELY SCENARIO’
  • Fed’s Kashkari: concerning inflation is spreading; we need to act with urgency
  • *BOWMAN: SEES RISK FOMC ACTIONS TO SLOW JOB GAINS, EVEN CUT JOBS
  • *DALY: MARKETS ARE AHEAD OF THEMSELVES ON FED CUTTING RATES
  • St. Louis Fed President James Bullard says he favors a strategy of “front-loading” big interest-rate hikes, repeating that he wants to end the year at 3.75% to 4% – Bloomberg
  • FED’S BULLARD: TO GET INFLATION COMING DOWN IN A CONVINCING WAY, WE’LL HAVE TO BE HIGHER FOR LONGER.
  • “If you have to cut off the tail of a dog, don’t do it one inch at a time.”- Fed President Bullard
  • “There is a path to getting inflation under control,” Barkin said, “but a recession could happen in the process” – MarketWatch
  • The Fed is “nowhere near” being done in its fight against inflation, said Mary Daly, the San Francisco Federal Reserve Bank president, in a CNBC interview Tuesday.  –MarketWatch
  • “We think it’s necessary to have growth slow down,” Powell said last week. “We actually think we need a period of growth below potential, to create some slack so that the supply side can catch up. We also think that there will be, in all likelihood, some softening in labor market conditions. And those are things that we expect…to get inflation back down on the path to 2 percent.”

Summary

We are highly doubtful that Powell will pivot anytime soon. Supporting our view is the recent action of the Bank of England. On August 4th they raised interest rates by 50bps despite forecasting a recession starting this year and lasting through 2023. Central bankers understand this inflation outbreak is unique and are caught off guard by its persistence.

The economy and markets may test their resolve, but the threat of a long-lasting price-wage spiral will keep the Fed and other banks from taking their foot off the brakes too soon.

We close by reminding you that inflation will start falling in the months ahead, but it hasn’t even officially peaked yet.

The post Will Powell Pivot? Don’t Count On It appeared first on RIA.

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Spread & Containment

Vehicle Sales: Fleet Turnover Ratio and the Inflation Impact

Back in early 2009, I wrote a couple of posts arguing there would be an increase in auto sales – Vehicle Sales (Jan 2009) and Looking for the Sun (Feb 2009).   This was an out-of-the-consensus call and helped me call the bottom for the US economy in mi…

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Back in early 2009, I wrote a couple of posts arguing there would be an increase in auto sales - Vehicle Sales (Jan 2009) and Looking for the Sun (Feb 2009).   This was an out-of-the-consensus call and helped me call the bottom for the US economy in mid-2009.

I wrote an update in 2014, and argued vehicle sales would "mostly move sideways" for the next few years.

Here is another update to the U.S. fleet turnover graph.

This graph shows the total number of registered vehicles in the U.S. divided by the sales rate through July 2022 - and gives a turnover ratio for the U.S. fleet (this doesn't tell you the age or the composition of the fleet).  Note: the number of registered vehicles is estimated for 2021 and 2022.

The wild swings in 2009 were due to the "cash for clunkers" program. 

And in April 2020, sales collapsed due to the onset of the pandemic.

Click on graph for larger image in graph gallery.

The estimated ratio for July is close to 21 years - well above the normal level.

Note: in 2009, I argued the turnover ratio would "probably decline to 15 or so eventually" and that happened - and will likely happen again.

The second graph shows light vehicle sales since the BEA started keeping data in 1967. The dashed line is current estimated sales rate.

Vehicle SalesThe current sales rate is still low mostly due to pandemic related supply constraints.

Light vehicle sales were at a 13.35 million seasonally adjusted annual rate (SAAR) in July.

I expect vehicle sales to increase over the next couple of years.

When the Fed fights inflation, housing is the primary transmission mechanism for Fed policy, since housing is interest rate sensitive.  

Usually, vehicle sales are impacted too by Fed policy, but probably not this time since sales are so low due to the supply constraints.

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Plunge In Gas Prices Sparks Surge In Real Spending, But Low-Income Consumers Remain Stressed

Plunge In Gas Prices Sparks Surge In Real Spending, But Low-Income Consumers Remain Stressed

In the aftermath of the recent plunge in gas…

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Plunge In Gas Prices Sparks Surge In Real Spending, But Low-Income Consumers Remain Stressed

In the aftermath of the recent plunge in gas prices, which has pulled the national average price to just above $4.00, two months after hitting an all time high north of $5.00, traders have been curious to see how retail spending will be impacted by this welcome development. And while the official data will be published next Wednesday, today we got an early glimpse thanks to the latest BofA card spending data which measures aggregated BofA credit and debit card data, and which was up 5.3% year-over-year (yoy) on a per household (HH) basis in July.

To be sure, the July number was artificially inflated in part by Prime Day and related promotions, which occurred in June last year. Which is why on an adjusted basis, July card spending per HH fell 0.2% month-over-month. It's also why BofA's economists forecast a 0.2% mom decrease in the Census Bureau’s July retail sales ex-autos figure, well below consensus of a +0.2% print.

But in a favorable twist, July's ostensible weakness was partly due to the plunge in gas prices, which led to a 5.8% mom drop in gas spending

According to BofA calculations, the share of gas in retail card spending ex autos fell by 0.7%, the largest single-month decline since April 2020

This has given consumers leeway to spend in other categories, and BofA expects a 0.9% mom increase in the Census Bureau’s core control retail sales print (retail sales ex autos gas, building materials and restaurants). And since the bank is forecasting soft headline inflation, it expects reported real (inflation-adjusted) consumer spending to rise sharply in July.

Digging deeper, BofA finds that the intra-month data show a broad increase in yoy spending growth in the latter part of July, particularly among lower-income households...

... where categories that benefited include clothing, restaurants and airlines.

According to BofA, "these trends bear watching – it remains to be seen whether they are driven primarily by lower gas prices or favorable base effects from last year’s Delta variant wave (which continued through Labor Day)." Meanwhile, the share of retail brick and mortar (B&M) spending outside households’ Metropolitan Statistical Areas (MSAs) and in foreign countries remains well above pre-pandemic levels.

This suggests that the boom in summer vacation spending continues.

How about continued signs of stress among lower-income households, an ominous development highlighted recently by the like of Walmart? According to BofA, the share of credit cards in total card spending is only up slightly relative to last year, and is below the pre-pandemic share for all but the top income cohort.

This suggests that on average, liquidity constraints have not made lower-income HHs significantly more reliant on credit. Moreover, discretionary spending has held up quite well among lower-income households over the last several months

Putting it all together, especially in the context of the recent US slide into a technical recession when two weeks ago 2Q GDP growth came in negative at -0.9% for the 2nd quarter in a row, BofA writes that "last Friday’s very strong jobs report went a long way towards allaying recession fears" and adds that "if the signal from the BAC card data is accurate, we are now probably looking at a solid start to economic activity in 3Q" and while the bank still expects a recession to start by year-end, it thinks "the risks are skewed towards a delay of a few months" which would give the Fed more room to tighten policy (before having to unwind it all), and is why BofA raised its forecast of the terminal fed funds range by 25bp to 3.50-3.75% after the July jobs report, warning that "risks to the view are still to the upside."

Tyler Durden Tue, 08/09/2022 - 14:30

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