Rabo: The Fed's Bullard Had A Revelation Yesterday, Though Some Will Say He Was Tripping

Rabo: The Fed’s Bullard Had A Revelation Yesterday, Though Some Will Say He Was Tripping

By Michael Every of Rabobank

The Doors Of Perception

The recent Davos summit didn’t have many answers to the list of conflating problems currently facing us.

At least we had ‘The Psychedelic House of Davos, an unofficial satellite event running alongside it, fodder for the comedians who noticed it. (As if there aren’t literally rich pickings there anyway.) The Guardian quotes Stephen Colbert on the topic: “Oh good, just what billionaires need: a looser grip on reality.” He was referring to a “shamanic investing” expert, whom Bloomberg described as having “deep expertise in ayahuasca and experience managing family investments”.

Back to Colbert: “Hopefully at the same time. ‘We split your investments between high yield stocks, medium yield bonds and the sense-memory of your wronged ancestors, who will appear to you as a wolf with your father’s voice. Now walk with me into the fire, where we will itemize your deductions.’”

Yet those versed in Huxley, Leary, Castaneda, Dick, and Groff would agree that encouraging the box-thinkers, box-tickers, and misquoted-dead-economists and line-on-chart worshippers among the market masses to open up their Doors of Perception would be no bad thing. “Most lead lives at worst so painful, at best so monotonous, poor and limited that the urge to escape, the longing to transcend themselves if only for a few moments, is and has always been one of the principle appetites of the soul,” wrote Huxley. They just generally opt to spin, not psilocybin.

The Fed’s Bullard had a revelation yesterday, though some will say he was tripping. (If so, the BoC may have dosed him with their 50bps hike.) “The current US macroeconomic situation is straining the Fed’s credibility with respect to its inflation target,” he said, adding that the cause of inflation is central bank policy, and so it is up to central banks to bring it under control. He wants Fed Funds at 3.50% by the end of the year, so another 250bps in hikes from here.

That’s a stance adjacent to but entirely consistent with the hypothesis here – that the Fed needs to get serious about rates to deal with the commodity upswing and the ongoing geopolitical shift away from using the dollar towards dollar-priced barter trade. Other things are secondary. Take down commodities, especially oil, and you take down inflation and blow up commodity barter trade, and certain EM (and DM) currencies. Suddenly, mocking the US, the US dollar, or holding a physical cargo in the shadow banking system –which the Fed was recently warning us about– or a ‘new world order’, will look as inflation- and volatility-proof as crypto. (As Solana goes all Icarus.)

That may necessitate US actions outside blinkered perceptions of central-bankery. Indeed, oil is off sharply this morning on an FT report that the Saudis will agree to pump more: if they are, it is not about the ‘US dollar weapon’ but US weapons, directly or indirectly. You don’t have to drop a tab to know that this is how the world actually works. We just choose not to see.

Of course, in his solipsistic, long, hard stare into the mirror at his own dilated pupils, Bullard overlooks that there are structural factors at play that rates alone cannot address:

  • Fiscal policy, as subsidies are rolled out to deal with rising energy and food prices – where the latter have a lot further to rise. Even in China, albeit at the margin, local governments are playing around with giving consumers vouchers to buy locally-made goodies.

  • Supply chains, where although the key Federal Maritime Commission report into recent logistical problems just declared they were due to “unprecedented consumer demand”, few on the ground, or at sea, concur. We argued in ‘In Deep Ship’ that it’s not industry collusion, as the White House alleges, so much as massive money being made by systemic inefficiencies there are high incentives not to deal with. Indeed, even as consumer demand eases, ‘Long-term contracted ocean freight rates set ‘staggering’ new records’. The 30.1% hike just seen means long-term rates are up 150.6% y-o-y, and in 2022 have climbed by 55%. Similarly, the Dallas Fed survey this week saw 30.5% of Texas-based manufacturers experiencing procurement-related problems vs. 25.8% three months ago, and 14.7% a year ago.

  • The war in Ukraine, where Kyiv says it is losing around 100 soldiers a day, perhaps 50,000 died in Mariupol, and the US and Germany just pledged to send medium-range rocket systems and anti-aircraft missiles and radar systems despite Russian objections.

Nonetheless, if it is “rates or nothing” then it needs to be much more than nothing on rates.

The Fed’s Beige Book reported “strong or robust price increases, especially for goods businesses need, which will have to be passed. Several districts said inflation had slowed a bit and others said customers were starting to resist price hikes, or had cut back on purchases or sought out cheaper alternatives. However, the Fed is likely to read this as ‘keep going’.

Every region said labor markets were tight and some companies could not produce enough to meet customer demand as a result. (And this is not a US thing: have you tried to fly from the UK or Europe recently?!) Some businesses said they had put hiring freezes in place, others the big wage increases over the past year were beginning to level off. However, the Fed is still likely to read this as ‘keep going’.

Notably, three Fed regional districts saw contacts express concerns about a recession when none did last month: “Rising prices and recession fears have turned consumers and firms more cautious,” the Philadelphia Fed said; “While many contacts remained optimistic, an increasing number expected a recession by year’s end,” the Boston Fed said. Is the Fed still likely to read this as ‘keep going’?

It’s perhaps not a surprise that Jamie Dimon, whose 10-year Treasury yield forecast might finally be right years late (US 10s at 2.90% at time of writing), is warning of an “economic hurricane” ahead for the US. I say not just for the US, or just *in* the US. Or just in the economy:

As Huxley argued,

“Each person is at each moment capable of remembering all that has ever happened to him and of perceiving everything that is happening everywhere in the universe. The function of the brain and nervous system is to protect us from being overwhelmed and confused by this mass of largely useless and irrelevant knowledge, by shutting out most of what we should otherwise perceive or remember at any moment, and leaving only that very small and special selection which is likely to be practically useful.”

That is almost certainly an exaggeration: I can’t remember where I left my glasses half the time. However, equally exaggerated is how overly-focused those in markets are on their narrow here-and-now specifics at the expense of the general and the what-could-be.

Nobody but yourself is stopping you from reading from a different newspaper or a broader selection of voices on social media; or about a different market than your own line on a screen; or even a different academic discipline that might impact on your ‘siloed’ area of expertise. The hurricane ahead, and how we may avoid the worst of it, was and is most visible to those whose doors of perception are at the very least ajar.

Blinkers off; seat-belts and crash helmets on; and eyes, and consciousnesses, open.

Tyler Durden
Thu, 06/02/2022 – 11:50

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