Trump’s Fed Chair Problem (How Do We Awaken Dorothy From Her Monetary Oz?)

President Trump has a problem. And it is who to select as The Federal Reserve Chair by November 3rd. Of course, he can always keep mega-dove Janet Yellen. Or he choose someone new like National Economic Council Director Gary Cohn, Fed Board Governor Jerome Powell, former Fed Governor Kevin Warsh or Stanford University economist John Taylor.

I like the “Bay Area Brawl.” Berkeley’s Yellen versus Stanford’s Taylor. That is, if Taylor is actually going to follow his own Taylor Rule. And then it depends of who estimates the Taylor Rule.

For example, Glenn Rudebusch at the San Francisco Fed’s specification of the Taylor Rule says that the Fed Funds Target Rate should be 5.73% (compared to the actual rate of 1.25%).

Charles Evans of the Chicago Fed, on the other hand, has a Taylor Rule specification that indicates that the Fed Funds Target Rate should be 0.49%, BELOW the current target rate of 1.25%.

Yellen would be closer to dovish Evans while Taylor would be closer to Rubebusch.

But regardless of who Trump selects, it should be someone that actually follows a rule of some kind (whether Taylor’s rule or a complex rule) THAT IS PUBLICLY ACCESSIBLE.

In the following chart, I compare the baseline Taylor Rule (white line) with the actual Fed Funds Target Rate. Before January 2009, the actual Fed Funds Target Rate followed the baseline Taylor Rule (even though the actual target rate went from “too high” to “too low” during the 2000s. Then Chair Ben Bernanke looks like he was following a Taylor Rule UNTIL late 2008. Rather than allowing the Fed Funds Target Rate to go negaitve, he added the infamous quantitative easing (QE) in order to push down the 10 year Treasury yield. Thus, it was Bernanke that threw away the Taylor Rule (and Yellen after him). We are now in land of Monetary Oz (a dreamworld with Emerald Cities and flying monkeys), but no rule to speak of.

But what we do have in the US economy is asset bubbles.

Of course, slowly raising rates and unwinding the $4.4 trillion Fed Balance Sheet is likely the correct approach. There are no ruby slippers that the new Fed Chair can tap to return to monetary normality. But what prevents this same Monetary Oz fantasy from happening again?

Perhaps Trump should ask the candidates about what they would do as Fed Chair, while they are dancing.


Bitcoin Hits All-time High (Market Cap Almost As Big As Goldman Sachs)

The crypto currency Bitcoin just hit another all-time high, reaching 5,606.


Here is Bitcoin relative to gold.

Bitcoin’s market cap is now $93.5 billion.

Making Bitcon almost as large as Goldman Sachs in terms of market capitalization.

While not quite bigger than Goldman Sachs, Bitcoin is on its way.

But unlike Goldman Sachs, Bitcoin is NOT Too-big-to-fail (TBTF).

Here is Lloyd Blankfein, Goldman Sach’s CEO, doing his best Hyman Roth impression from The Godfather 2.

The Bitcoin “Smile”: Bitcoin Continues Surging As US Dollar Continues Devaluation of Consumer Purchasing Power

The Federal Reserve was created by an act of Congress in 1913 and a stroke of the pen by President Woodrow Wilson. And the purchasing power of US consumers has never been the same.

Enter Bitcoin, the worldwide cryptocurrency and digital payment system. Currently, one  Bitcoin equals $4,396.00.


While this looks like a volatility smile, it is not. It does show the erosion of the purchasing power of the US Dollar and the rise of an alternative currency: the  cryptodollar.

In a remarkably frank talk at a Bank of England conference, the Managing Director of the International Monetary Fund,  Christine Lagarde, speculated that Bitcoin and cryptocurrency have as much of a future as the Internet itself.  It could displace central banks, conventional banking, and challenge the monopoly of national monies.

This the polite version of Dennis Hopper’s preference for Pabst Blue Ribbon beer.

Hey, although he signed The Federal Reserve into existance, at least he could pitch!


Venezuela’s 10Y Sovereign Yield Hits 34.1% (6 Mo CDS Hits 15,500)

Venezuela’s 10 year sovereign yield just hit 34.1%, the highest in the world.

Venezuela’s sovereign yield curve (green line, denominated in US Dollars) is steeply inverted. Venezuela’s SR CDS (and Petróleos de Venezuela SR CDS) are both showing extrememly high levels for the next 6 months (right-hand axis).

Socialism sounds wonderful (to politicians) when crude oil is selling at over $100 a barrell. But not so much when oil is under $50 a barrell.

With annual inflation running at over 2,000%, you know you’ve got trouble in oil city. 

Well, at least some Venezuelans have toilet paper and food.

Unlike these shoppers. And you wonder why annual inflation is over 2,000%?


BIS Hunts for ‘Missing’ Global Debt, Inflation (Try Including Housing!)

Just like global central banks, the Bank for International Settlements can’t seem to find inflation and $114 trillion in off-balance sheet FX derivatives.

ZURICH – Nonfinancial companies and other institutions outside of the U.S., excluding banks, may be sitting on as much as $14 trillion in “missing debt” held off their balance sheets through foreign-exchange derivatives, according to research published Sunday by the Bank for International Settlements.

These transactions, which resemble debt but for accounting purposes aren’t classified that way, aren’t new. Rather, researchers from the BIS — a consortium of central banks based in Basel, Switzerland — used global banking data and surveys to estimate the size of this debt for the first time.

The implications for financial stability are unclear because FX swaps are backed by cash collateral and can be used to hedge exposure to currency swings, thus promoting stability. Still, the debt “has to be repaid when due and this can raise risk,” the authors wrote.

According to the paper, published with the BIS’s quarterly update on global financial conditions, non-banks outside the U.S. owed roughly $13 trillion to 14 trillion through foreign-exchange swaps and forwards. That exceeds the nearly $10.7 trillion in dollar debt held on their balance sheets at the end of the first quarter

“Non-banks” include nonfinancial companies, households, governments, and certain financial institutions that aren’t classified as banks and international organizations.

Globally, there are $58 trillion in FX swaps and related exposures, BIS said, which equals about three-quarters of global gross domestic product.

The authors explained that “in an FX swap, two parties exchange two currencies spot and commit to reverse the exchange at some pre-agreed future date and price.” In a forward contract, parties agree to swap currencies at a future date and price. “Accounting conventions leave it mostly off-balance sheet, as a derivative, even though it is in effect a secured loan with principal to be repaid in full at maturity,” the paper noted.

This short-term funding is backed by cash and it carries little credit risk. “Even so, strains can arise,” the authors wrote, citing the funding squeeze experienced by European banks during the global financial crisis.

The BIS’s quarterly review didn’t just examine missing debt, it also examined what it called “missing inflation” in the global economy, which has helped spur risk taking and drove up financial asset values in recent months.

The implications are big for stock and bond markets that have moved largely in tandem, with bond yields staying super low while equity markets reached record highs. Whereas faster growth typically implies higher inflation and central bank rate increases, the prospect of significantly tighter monetary policy in the U.S. and other big economies has receded.

“This puts a premium on understanding the ‘missing inflation’, because inflation is the lodestar for central banks,” said BIS chief economist Claudio Borio.

Annual inflation in the U.S., measured by the price index for personal-consumption expenditures, was 1.4% in July. Annual eurozone inflation was 1.5% in August. Both are well below the 2% rate that most big central banks consider optimal. Economists typically cite sluggish wage growth, heightened global competition, low oil prices and the effects of technological changes as explanations for subdued price pressures.

“Despite subdued inflation in advanced economies, the global macro outlook was upbeat. Market commentators label such an environment the Goldilocks scenario — where the economy is ‘not too hot, not too cold, but just right,'” BIS said.

Still, there are risks if bond yields eventually start to rise on the back of firmer global growth, given the sensitivity of the private and public sectors to debt.

Thus, the absence of inflation “is the trillion dollar question that will define the global economy’s path in the years ahead and determine, in all probability, the future of current policy frameworks,” said Mr. Borio.

Dear Federal Reserve and BIS. Try including house prices which are growing at fantastic rates of growth.


Tell folks in New Zealand and Australia that there is “no inflation.”


The US almost looks tame in terms of housing pirces compared to Britain and its former colonies where housing prices are growing over twice as fast as wage growth for the majority of the population.


New Zealand takes the cake for crazy housing prices, particularly in Auckland, their largest city.


There BIS. We found your missing inflation. 


ECB And Draghi Keep Rates At Zero, Downgrades 2018 Inflation To 1.2% (To Infinity … And Beyond!)

The European Central Bank (ECB) President Mario Draghi is mimicking Buzz Lightyear from Pixar’s Toy Story: “To Infinity and Beyond!” That is, Draghi announced today that the ECB is keeping their key rates at 0%, 0.25% and -0.40%.

At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.


And like the US, the measured inflation rate in the Gyrozone is forecast to be 1.2% in 2018 and 1.5% in 2019.


Of course, “Super Mario” thinks everything is beautiful in the European Zone. Although of the big three (Germany, UK and France), only Germany has YoY GDP growth of over 2%.


The good news? The number of EMEA (Europe, Middle East, Africa) countries with negative 2 year sovereign yields stayed at 19.


But the Central Banks are engaged in a monetary form of “Dueling Banjos”


Or as Mario Draghi says, “To infinity … and beyond!” for ECB monetary policy.

Infinity and Beyond

Core PCE Prices YoY (“Inflation”) Fall To 1.4% In July (The Dreaded Inflation Mirage)

Federal Reserve Chair Janet Yellen and the Federal Reserve Open Market Committee (FOMC) are frustrated in their inability to generate even 2% inflation (as they define it). Personal Consumption Expenditure Core Prices YoY for July fell to 1.40% YoY.


The PCE Core DEFLATOR YoY remain at 1.4% YoY for July.


Personal income and spending both rose in July, but personal spending was lower than forecast.


According to the Taylor Rule (Rudebusch specification), The Fed Funds Target Rate remains 446 basis points below where it should be.


Bear in mind that The Fed’s definition of inflation (Core PCE Prices YoY or the Core PCE Price Deflator YoY) effectively leaves out home prices which are currently growing at 2x wage growth.


Inflation (without home prices, food and energy) remains a mirage.