Seeking knowledge. Or is it merely the truth that we are after? Then again, what is this truth that you and I both seek? What qualifies as knowledge? The purest truth, the interpretation of a real, in-depth knowledge might just terrify. Perhaps it's best that we continue on in this hall of mirrors for as long as possible. Perhaps it's best that we never actually find what we seek. Perhaps it's best that we admit that we don't know, and that we understand that neither do "they."
The day has passed. The Fed has released the committee's latest take on policy, while updating their economic projections in aggregate. The chair, Jerome Powell, whom I truly believe to be well-intentioned, has addressed the media. So much focus placed on a group that has largely proven over time, with no insult intended, their own humanity, their own imperfection.
There was one major change made to the official policy statement. In late January, the press release read: "The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic." That piece explained further the weakness in demand and declining oil prices that were suppressing inflation. By mid-March, that section turned into: "Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak. Inflation continues to run below 2 percent."
Later in the release, one very important item remains unchanged: "In addition, the Federal Reserve will continue to increase its holding of Treasury securities by at least $80B per month and of agency mortgage-backed securities by at least $40B per month until substantial further progress has been made toward the Committee's maximum employment and price stability goals."
A Hamburger Today
At the end of the day, the Federal Reserve Bank signaled the intention to keep short-term interest rates pinned as close to zero as possible over the long term, while also committing to carry on with the aggressive expansion of the central bank's balance sheet, or from a national point of view, the monetary base/money supply. In short, the Fed on the feast day of St. Patrick, in the year of my Lord 2021, committed to maintaining ultra-loose monetary policy while simultaneously upgrading the group's aggregate forecasts for domestic economic growth, labor market conditions, and even consumer-level inflation.
Taking a glance at the central bank's economic projections, one must fully understand that this group has been almost as consistently wrong in predicting the future based on current conditions as one could have ever possibly imagined. These folks may be PhD economists, outside of Powell, but that does not mean that they "get it." That said, the group increased their median expectation for 2021 GDP growth to 6.5% from 4.2% in December with a low forecast of 5% and a high of 7.3%. The group also sees the 2021 Unemployment Rate at 4.5%, down from their 5% forecast three months ago, while also seeing headline consumer-level inflation rise to 2.4%, while core inflation rises to 2.2%.
Oh, did I mention that while this group sees economic activity and demand for labor soaring, while inflation levels off above 2%, not a single one of 18 forecasters sees any change made to fed funds rate targeting at any point this year, and 11 of those 18 "dots" do not see a reason to move on short-term rates at any point over the next three years. However, all 18 of our "seers" expect the fed funds rate to end up somewhere between 2% and 3% over the poorly defined "longer run."
As a very wise man once said: "I'll gladly pay you Tuesday for a hamburger today."
So, Let It Be Written...
Fed Chair Jerome Powell managed to reassure both debt and equity investors, at least in real time. The U.S. 10-Year Note rallied, from paying as much as 1.69% earlier in the session to less than 1.63% later in the afternoon. Equities were all too happy to tag along.
All of your favorite equity indices closed higher. Breadth was strong across both of New York's primary equity exchanges, albeit on sideways trading volume. Once again, winners and losers across the sector performance tables were precisely selected by algorithmic traders as the top-five sectors for the day were the five cyclical groups followed by the two growth sectors that were in turn followed by the four sectors considered to be "defensive" in nature. Think analytics are ruining baseball?
All seemed well, until it wasn't. Shortly after midnight (on the East Coast of the United States) global investors turned against longer-dated sovereign debt, especially debt usually afforded a "safe haven" premium. I have seen the 10-year yield at more than 1.74% early this morning. I have seen similar (relative) spikes in what German and Japanese 10-year paper yield. This has put intense pressure on Nasdaq futures overnight, while Dow futures have remained green.
If these moves hold into the regular U.S. trading session, that would be something of a disappointment as on Wednesday, the Nasdaq Composite, and the Technology Select Sector SPDR ETF (XLK) both survived tests of their individual 21-day exponential moving averages and 50-day simple moving averages, while the Nasdaq 100 closed above its 50-day SMA for the first time since suffering the "swing traders" mini-death cross" back on March 5. That, readers will recall, was the reversal day for the Nasdaq Composite that was not confirmed for me as a change in trend (for the better) until this week.
All of this understood, this week's daily gains for the Nasdaq Composite have been quite pedestrian in nature. It will not take much downward pressure to unwind what I had perhaps erroneously (not giving up yet) seen as activity that had been quite constructive in nature. Know what? That's trading, and trading is important, but investing far more so. I'd like to be both, but if I could only be a good trader or a good investor, an investor I would be.
Well, I fall back on what I wrote on Wednesday morning. We have become a society reliant upon artificial means of support that skew free-market price discovery. Everyone with a pulse understands this. That is why Powell keeps on referring to current and future bouts with consumer-level inflation as "transient." He does not yet trust the inflation he sees and quite frankly, neither do I. The gap in between January and February macroeconomic performance speaks volumes. Remember the fried eggs commercial? This is your brain. This is your brain on drugs. Funny. Not funny.
This is also the reason behind the Fed's commitment to balance sheet expansion. Remember what I showed you last week? The blurring of the difference in defining M1 money supply from M2 while the Fed simultaneously -- and obviously intentionally -- becomes less transparent in their monthly H6 statistical release in disclosing U.S. government deposits at the central bank.
What could it all mean?
Perhaps nothing. Perhaps my imagination runs wild. Perhaps, after this latest very large fiscal support package, and before the next even-larger fiscal spending (infrastructure) deal, all amid a pandemic that if you haven't noticed is back on the rise (here in New York, around the nation, and globally), that the central bank understands its future role is to fund the federal government at its own expense (which does not really matter if the central bank is not truly independent of the Treasury Department) in order to tamp down the expanse of servicing the federal government's debt.
Remember this. When we were healthy, the size of the U.S. economy topped $21 trillion. The U.S. national debt has now leapt above $28 trillion. That's just the federal government. Now because all economic activity is included in GDP, all debt must be included in making this comparison as well. Add to federal debt, state debt, the debts of municipalities, financial institutions, businesses, and households and suddenly total U.S. debt rises to an insurmountable $82.6 trillion. In a debt-ridden society, you'll be able to count on the "Keynesian Multiplier" to be about as reliable as the Phillips Curve. Translation? A dollar borrowed and spent may return less than a dollar in economic activity. Starting to follow?
- Q) Is a managed economy the only way out?
- A) There is no easy way out. A managed economy may be the only way to suspend the endgame for a time.
- Q) Will the Fed let the long end of the Treasury Curve trade freely?
- A) Only if the long end plays nice. Once it costs the federal government too much to service that debt, either the federal government will adjust the size and scope of its auction schedule, or the central bank will retarget the average maturity of the balance sheet. There will be a renewal of "Operation Twist" prior to the implementation of overt "Yield Curve Control," which in turn will come before openly adopting "Modern Monetary Theory" and an attempt to completely manage an economy already lost to the echoes of time.
- Q) Can we still prevent a long-term negative outcome?
- A) We have already brought forward generations' worth of economic growth in order to satisfy decades of irresponsible policy. We will soon reach out for more. The only way to reset the economy, would be to allow growth to contract so that productivity and velocity might catch up. This would result in not recession, but in depression, a lengthy depression. There will be no political will to reset in this way. I think we ride this pony until it drops. Just understand that there is a day out there. This pony will drop.
Ending On a Happy Note
-- Amazon (AMZN) appears ready to disrupt the healthcare industry through a national expansion of telehealth. Former Sarge fave Teladoc (TDOC) sold off hard on the news. Pharmacy chains CVS Health (CVS) and Walgreens Boots Alliance (WBA) also took the news poorly.
-- AMC Entertainment Holdings (AMC) announced that approximately 98% of its U.S. locations will have resumed operations by next Friday, March 26. Popcorn manufacturers are now left to ramp up production working 24 hours around the clock.
-- High level meetings between Biden administration officials and Beijing kick off in Alaska today, with hopes that the respective heads of state might meet in person as soon as next month.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Last 712K.
08:30 - Continuing Claims (Weekly): Last 4.144M.
08:30 - Philadelphia Fed Manufacturing Index (February): Expecting 24.1, Last 23.1.
10:00 - CB Leading Indicators (February): Expecting 0.3% m/m, Last 0.5% m/m.
10:30 - Natural Gas Inventories (Weekly): Last -52B cf.
The Fed (All Times Eastern)
No public appearances scheduled.