Arsonist & Fireman
A review of the week with a focus on the Fed and the Treasury as they row in different directions.
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Transcript
All right.
2
:Welcome back to another
edition of Daily Discernments.
3
:And as I warned, it's gonna
be very much almost daily.
4
:this is more of a week that was.
5
:there was a lot to talk about this
week, but I was trying to kinda take a
6
:step back and think about these things
a little deeper before I recorded.
7
:obviously I have the Daily Dots that I
do, you know, very much closer to daily.
8
:and then my Twitter feed, which I feel
like is kinda thinking fast, and I, I
9
:kinda want this to be thinking slow.
10
:So I didn't wanna overreact to the
Treasury stuff and talk too much
11
:about it on here earlier this week,
especially given that we obviously
12
:had Jackson Hole coming up Friday.
13
:So instead of throwing some videos
at you with my initial thoughts on
14
:that stuff kind of throughout the
early week, I decided, nah, I'll just
15
:do it at the end of the week when
I can kind of look at it from afar,
16
:you know, a, a, a little better.
17
:so I'll kinda catch you up on my
thoughts on really on Fed and Treasury
18
:at the end of the day because y-
there's a lot of other stuff going
19
:on, but that was the, that was, that
was really the headline for the week.
20
:At the end of the day, I think the
Treasury Secretary bit off more than
21
:he meant to chew by going all the way
to, you know, we'll use the TGA to
22
:backstop, you know, capping yields here.
23
:I think he just wanted to get
yields down, you know, ten,
24
:20 bips just to cool it off.
25
:which, you know, so far has
been perhaps kind of effective.
26
:at least, you know, we're basically
where we, where we are when we
27
:started this whole thing, but at
least you're not higher, I guess.
28
:but to say we're gonna throw the TGA
at it, and to have, you know, Druck
29
:have a, drop an op-ed criticizing,
criticizing, you know, this emergency
30
:policy stance despite no emergency,
I, I just feel like he did more
31
:than he should have done there.
32
:And I, I think if you gave him the
opportunity to go back in time and ask
33
:him if you wanna, if you wanna tell the
world you're gonna throw the TGA at,
34
:you know, dramatically reducing the,
the weighted average maturity of, of
35
:the national debt, because, you know,
the-- you don't like the market price.
36
:Is like, is that something
you would like to do?
37
:I think he would be like, "No.
38
:Like, I just wanted to say we will bump
up these buybacks You know, enough to
39
:just cool off yields for a little bit.
40
:but that's why you should never
put yourself into a, a situation
41
:where you have to, you have to
keep re-escalating with the market.
42
:Either you're willing to do all those
escalations or you just shouldn't touch
43
:it, especially with the bond market.
44
:Like this isn't, as I've stated before,
like this isn't oil, this isn't, this
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:isn't some of these other markets that
are smaller or maybe mostly levered
46
:players and futures like this is real
money with, with real interests and, and,
47
:and this stuff, and it's the kinda global
benchmark for, for credit, for risk.
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:Like it-- this is a different game, and
I think he lost sight of the fact that
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:that was a different game, along the way.
50
:Now, you know, if we get yields busting
out to, to new highs next week, then we
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:get to find out like how serious is he?
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:How much, how much balance sheet is
he willing to throw at this thing?
53
:we'll just have to see.
54
:As far as, you know, the Fed, my view
was because Bessent had fumbled this, he
55
:really needed the Fed to come out and,
and make it clear somehow that they,
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:they actually still care about inflation.
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:Because so far, you know, Warshaw's
talked a good game while also
58
:saying he didn't wanna do anything
'cause, you know, he could just let,
59
:he could let rates do it for him.
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:But as soon as Bessent said, "We're
not gonna let rates do anything for
61
:you," to me, he kinda had to pivot
back to like, "Oh yeah, the policy
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:rate's actually pretty important."
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:And I th- I thought he did
that today at Jackson Hole.
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:Like, you know, he used the word hike a
few times talking about physically hiking,
65
:but I, I personally took that as a signal.
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:Now, you could argue he was
trying to, he was trying to move
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:around the algos by throwing the,
the word in there a few times.
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:Maybe that's true, but, I thought he
put a lot on the line to, to add some
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:credibility back to the Fed after I think
he, a- at least on some level, put it,
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:you know, at risk a little bit, I would
say, with the, with the July meeting.
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:but they're at odds.
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:I mean, if he's going to, you know,
if he, if he wants long-term yields
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:to help him tighten, but the Treasury
doesn't want yong- long-term yields
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:to go up anymore, like that's at odds.
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:Like, you can't have
both, so they gotta pick.
76
:So Bessent needs to either stop
talking about yields, or he needs
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:to not, not do more than the,
the liquidity program buybacks.
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:Like if they do activist buybacks, that's,
that's different, and then the Fed has to
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:kinda mop that up with the policy rate.
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:Or you just make it clear that nobody in
DC cares about inflation, not the Fed,
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:not the Oval Office, not the Treasury.
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:And if none of them care, I don't…
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:I'm not sure Congress even
knows what inflation is anymore.
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:So, like, it just makes it clear
there's no adults in the room.
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:No one cares about inflation.
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:They're gonna truly let it run hot.
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:And that's when you, that's when
you can lose expectations, because
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:expectations expect you as a
policymaker to do something about it.
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:And for now, you know, that's,
that's what the market expects,
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:policymakers to do something about it.
91
:And again, he-- I, I do think
he took a step in the right
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:direction on that stuff today.
93
:So I think you had a significant
communication error by, by Scott
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:Bessent and the Treasury, because
to be fair to him, he's not the
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:one that said the TGA thing.
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:That was like a CNBC thing that
came from some unnamed officials.
97
:But, I wanted to highlight a few things
that, Warsh said today with s- just
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:with some thoughts on them, because I
think some of the stuff's important.
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:he said, "The Fed needs clear market
signals as unfiltered as possible
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:from market internals, the level and
change of asset price, prices across
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:sectors, the prices and trading volumes
of Treasury securities, the foreign
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:exchange value of the dollar, the cost
and availability of credit, and the
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:price of a broad set of commodities.
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:These and other indicators should
inform the Fed's near-term outlook,
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:on economic activity and inflation
throughout the business cycle.
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:They should also reveal the state of
broader financial conditions and the risks
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:of uncertainties in the financial sector."
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:Totally.
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:But that's, that's the
whole point on Bessent.
110
:If Bessent's gonna get in there
and, you know, throw a stick in the
111
:spokes of the treasury market, you're
not gonna get a clear read on those
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:prices and those trading volumes and
what, what the markets think about,
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:you know, the economy and the data.
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:Like, it messes all that up.
115
:Not to mention the value of the dollar
because that, that's a part of it.
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:Obviously, the cost and availability
of credit gets messed with if
117
:the Fed's going to cap yields.
118
:so it's just interesting to
read, read that in light of
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:what just happened, obviously.
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:He went on and said, "The
economic literature has long
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:described the distorting effects,
a hall of mirrors problem.
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:If markets rely materially on the Fed's
guidance and the Fed relies on market
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:prices, we're all, all more likely
to be blinded to new developments,
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:more likely to be caught unprepared
for a turn of events, and more likely
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:to commit errors in policymaking."
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:Of course, but if Scott Bessent's
gonna hold up a giant mirror
127
:in the hall of mirrors, I don't
understand how that helps.
128
:But again, hey, maybe this is why,
you know, there was a little bit
129
:of a war, if you think that it
was legit coming from Druck in,
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:in that Wall Street Journal op-ed.
131
:he said-- he went on later to say,
"There should be no misunderstandings.
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:The Fed's price stability objective is
two percent, as measured by the PCE.
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:It's a firm fixed target.
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:Let's be equally clear about
another aspect of the objective.
135
:Price stability is not self-executing, nor
is inflation necessarily mean-reverting.
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:It's the Fed's job to
deliver stable prices."
137
:I mean, I could not agree with that more.
138
:Now, it's important to remember last,
in Ju- in July, he went kind of, kind
139
:of far out of his way to make it clear
he, he wanted to move away from PCE.
140
:So him, like, kinda stapling PCE to
your forehead here and, and kinda
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:re-underwriting it, it was important.
142
:He, he threw it under the bus, and
I think the market didn't appreciate
143
:that, nor should it have, in my opinion.
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:So the fact that he, like, kind
of re-underwrite it-- wrote it
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:here to be like, "All right.
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:Yes, maybe we'll change that later,
but for now, like, I-- yes, two
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:percent PCE, that's the thing.
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:and it's totally our job to deliver that."
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:Great.
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:But you've had two meetings
and you haven't raised rates.
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:Now you're talking hawkish for
the, basically the third time.
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:Are you gonna raise rates in September?
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:And if not, then the market's gonna stop
listening to your tough talk, right?
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:I thought that was forcefully hawkish
that he would go out of his way
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:to, to, to say that, personally.
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:But, you know 2.0%
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:is the, is the target on PCE.
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:It's running at three point seven.
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:six-- I think six-month
annualizes even higher than that.
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:So why aren't you hiking?
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:Like, what are we talking about?
162
:Like…
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:So again, you, you could
talk hawkish all day.
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:You can, you can talk about hikes,
but if you're not gonna actually
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:hike, then the market's really
gonna start having problems.
166
:He said short-term interest
rates are the predominant tool
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:to achieve the dual mandate.
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:Unconventional policies to spur
economic activity may suit genuine
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:crises, but should otherwise
be used sparingly, if at all.
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:To be very clear, the Treasury's
buyback policy, if they start
171
:doing that past liquidity, and
to do it as a price control, is
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:obviously unconventional policy.
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:It would be used if it's
currently not in a genuine crisis.
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:that's obviously not sparingly.
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:Like, if you got four percent inflation,
four percent unemployment, four percent
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:growth, and you're doing unconventional
policy to spur economic, economic activity
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:or to get rates down or both, I mean,
that could not fly any harder in the face
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:of exactly what Warshaw's saying here.
179
:So to me, it's another shot across
the bow at, at what's going on, you
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:know, at Treasury, but we'll see.
181
:He went on to say money matters, which I,
this whole passage I agree with in full.
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:I just wanna make that clear.
183
:It's not fashionable these days, but
my view is that money has something
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:important to do with monetary policy.
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:We should pay attention to money created
by the central bank and money that comes
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:from the banking and financial systems,
I would argue also from deficits.
187
:it's true the financial innovations and
other factors alter the mechanics that
188
:link the monetary base, the velocity
of money, and the broader economy.
189
:But that is scarcely a reason to
ignore the ultimate effects of money
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:on financial conditions and prices.
191
:I really couldn't agree more.
192
:Like, the Fed just threw away
caring about money supply, years
193
:ago, and I think it's getting
import-- it's, it's important again.
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:I, I think COVID showed that, that whole
era where, you know, the money supply
195
:took off, no one cared, it was transitory.
196
:Next thing you knew, you had
huge inflation, like duh.
197
:But the, the problem here for Warsh is
like you have money, money supply growing
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:like kinda six to eight percent right now.
199
:So that's pretty, that's
pretty dang inflationary.
200
:So again, to use your own metrics
here, money supply is becoming
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:its own problem, and it sounds
like Treasury would really like to
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:goose lending from, from the banks.
203
:that'd be a giant money supply problem.
204
:Obviously, the, the budget deficit is a
giant money supply problem on its own.
205
:So if you get both kind of running at, you
know, close to full strength or, or above
206
:even, if you kinda think about it, money
supply would be a huge inflationary issue.
207
:So again, don't talk about it if you're
not willing to do something about it.
208
:and I, I'll go back to say him, him
like highlighting, hey, the policy
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:rate is, is the most important thing.
210
:That's important because the…
211
:in July, he kinda made it sound with
his non-answers like maybe he didn't
212
:view the policy rate as the thing.
213
:It was like, "Oh, it's fine because
we can just use like long end yields
214
:to help us out," or, you know,
"Maybe we use the balance sheet.
215
:You know, we'll, we'll reduce
the balance sheet, and that'll
216
:fight inflation for us."
217
:Like, it seemed like he was
focused on non-policy rate stuff.
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:So the fact that in this, in this
speech at least, he kind of, you know,
219
:really stamped how important the policy
rate is, and that was the main thing.
220
:That was important because again,
that, that puts all this emphasis
221
:on, okay, well then you better use
the policy rate since inflation's
222
:running almost twice your target.
223
:and in my opinion, not gonna
get any better anytime soon.
224
:he went on to say later that
credit and loan markets are showing
225
:few signs of policy restraint.
226
:That was important.
227
:So if you're telling me that,
that, you know, money and credit
228
:show-- don't show restraint, then,
then you're telling me that the
229
:policy rate is too low, obviously.
230
:So again, do something about it.
231
:Stop having, stop having
meetings where you don't hike.
232
:he said the jobless rate at four point
one percent was by historical standards
233
:has not changed, much for a couple years.
234
:Unemployment claims on a four-week
average, empirically robust
235
:real-time indicator are near
their lowest level in decades.
236
:So he, he basically went out of his way
to say, "Yeah, you're at full employment."
237
:So again, sounds like another
reason to, to, to hike, right?
238
:You got inflation running hot,
and you're at full employment.
239
:I don't…
240
:It's kind of obvious what
you're supposed to do there.
241
:He was talking about inflation.
242
:He said, "We, we also want to
understand not just the direction
243
:of travel, but also at the speed.
244
:Each of these broad inflation measures
has fallen significantly from their
245
:twenty twenty-two heights, but progress
over the past two years has been modest."
246
:That annoyed me 'cause there has been
no progress over the last two years.
247
:Inflation today is higher by a pretty
good margin than it was two years ago.
248
:So there's been less than modest,
progress because there's been no progress.
249
:you-- two years ago, PCE was two point
five nine, now it's three point seven.
250
:Like, stop.
251
:he said, "To try and gauge
underlying inflation, I find
252
:it instructive to disaggregate
the one hundred and ninety-nine
253
:individual components of the PCE.
254
:Over the last twelve months,
fifty-four percent of goods and
255
:services in the PCE basket show
price increases above three percent.
256
:This is well below the pre-pandemic
highs or the post-pandemic highs of
257
:seventy-seven percent, but it's well above
the level of thirty-two percent in the
258
:last twenty years before the pandemic."
259
:I, I totally agree with him here.
260
:Like, that's a-- it's a great
way of, of measuring inflation
261
:on a kinda thumb in the air way.
262
:Like, okay, just how much stuff is
like high and how much of it isn't?
263
:And whenever, you know, more than
half of the stuff you measure is above
264
:three percent, you're probably not
doing great on your two percent target.
265
:I don't, you know, that's
pretty obvious, but I like the
266
:simplicity of, of that measure.
267
:Now, obviously, you combine that
with all the other measures and
268
:to get that holistic picture, but
again, that screams hike, man.
269
:Like, so stop talking
about it and be about it.
270
:the last one I'll read from, from
his speech today, said, "It matters
271
:too whether the inflation readings
of the post-- past five years
272
:have seeped into expectations.
273
:The good news is that measures of
inflation expectations in the medium term,
274
:by and large, look stable, and inflation
compensation measures from the swaps
275
:market send a strong and similar message."
276
:One hundred percent.
277
:Like, I don't-- the inflationists
out there, like and I am one, big
278
:time, have to admit, like inflation
expectations are largely fine.
279
:Like, it's not scary.
280
:It's not bad.
281
:You know, sometimes when some of
us get carried away about how bad
282
:inflation is about to be, that may be
true, but it's not in expectations.
283
:and I think that gives the Fed some,
some, you know, some leeway to play
284
:this a little slower than I would like
to see from a pure policy standpoint.
285
:but what I will say is if he didn't
come out hawkish today, he stayed
286
:dovish, they didn't hike for the
next few months, and inflation was
287
:running above four, that-that's
where the expectations come in.
288
:Like, if you show that you're not
willing to, to fight inflation, the
289
:Treasury doesn't care, the Oval Office
doesn't care, Congress doesn't care,
290
:that's when all of a sudden the market
has to really do all the caring.
291
:and if you start holding yields down
while running it hot While inflation
292
:is above four, like, that would
be, like, the, the regime I think,
293
:especially after you've been well
above target for five, six years.
294
:Like, that would be the regime where
the expectations could just blow out.
295
:And that's one of those deals where
once, once those, you know, expectations
296
:jump the fence, it's, it's very hard to
catch them and put them back in the pen.
297
:So you just can't let them get out.
298
:and he paid good lip
service to that today.
299
:But again, you know, if you keep
talking tough and not hiking, eventually
300
:the market is going to, you know,
understand what you're doing, like,
301
:pick up on the game you're playing.
302
:that was it for me for, like, as
far as the Fed Treasury stuff.
303
:I think Bessent stepped in
it, but it, you know, it, it
304
:doesn't mean he can't kind of…
305
:If he just stops talking
about it, it'll go away.
306
:And, or if he kind of, like, puts
the toothpaste back in the tube
307
:by being, "Look, hey, I'll-- we're
just gonna do the liquidity stuff.
308
:I never said we're gonna do
the, you know, TGA, throwing the
309
:whole balance sheet at yields.
310
:Like, I'm not doing that.
311
:I'm just here to manage
liquidity problems.
312
:That's it."
313
:If he puts the toothpaste back in the
tube on that, then I think you're good.
314
:Then, you know, it's not yield
curve control just 'cause he
315
:doesn't like the price, like it
really, really looked come Monday.
316
:but we'll see.
317
:I mean, the ten-year just closed out
at four point seven two on the, on
318
:the week, basically at the highs,
up five basis points on the day.
319
:And I th-I thought you could get long
in yields down, if he was hawkish, but
320
:instead, you, you know, you, you, you
flatten, which is I guess decent, but
321
:even the thirty-year yield was up today.
322
:I would have guessed it would've been
down five basis points and it was
323
:up one, so, shows what I know on,
on that, on that from that angle.
324
:But, you know, you had, you had a week
where oil's down, so that, that's,
325
:that's very beneficial here short term.
326
:so if you get oil up five percent next
week and rates are up another ten,
327
:fifteen bips, like, what does he do?
328
:And what does he do about the yen?
329
:The yen's, like, right back
above one sixty to the dollar.
330
:you know, and, and you got rates not that
far away from five percent on the ten.
331
:Like, is he willing to just let
it go, or is he really gonna truly
332
:throw the balance sheet at, at this
because he doesn't like the price?
333
:We're all gonna have to find that one out.
334
:you know, for the end of this
week, gold got smacked because
335
:at least the Fed shows they care.
336
:Totally makes sense.
337
:Basically what I half
expected to happen today.
338
:but if you come in the next week or
the week after, you know, next couple
339
:of months, whatever, however you
wanna look at it, and inflation prints
340
:start really blowing out the long end
again, if Bessent comes to the rescue
341
:and buys a bunch just to keep yields
down, then you're right back to the,
342
:the debasement game being, being on.
343
:It's like when the car passes
by and you say, "Game on."
344
:That, that's where you'll be.
345
:So we'll just have to watch it,
you know, for the next few weeks,
346
:see what Bessent really does.
347
:For now, you have a Fed chair that
looks hawkish and looks like he
348
:actually means that he's going to
hike, in the next meeting or two.
349
:I would say the next meeting.
350
:but we'll have to see.
351
:But that's it for me this week.
352
:See y'all probably sometime
next week at some point.
353
:cheers.
