Former central banker and capital market specialist commenting on markets, politics and other major topics
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I’ll tell you a story that was related to me a number of years ago. This person’s daughter went to one of the major New York hospitals. It turns out she was severely dehydrated and was admitted for the night.
The next morning, she was released and went to check out with her parent. If I recall correctly, they received a bill of nearly $20,000. The parent, a government employee took out her insurance card. However, her daughter had turned 26 a few days earlier and was no longer covered.
After recovering from the shock, the clerk was informed that they would not be able to pay such a sum. She was directed to the payment office to see what could be worked out.
The financial officer immediately suggested that they return and inform the clerk that their child was an illegal alien, and they would not have to pay, something they were unwilling to do.
This pretty much tell you everything you need to know about the corrosive consequences of illegal immigration.
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Charlie what is the average we are
paying for gas, and how much are we paying in taxes?
Americans are now paying $4.48/gallon on average for gasoline. That's the highest level ever for this point in September and 42% above the price from a year ago.
"When you add the United States and Venezuela together we have more than 60% of the oil in the world. To the victor belong the spoils." - President Trump
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Except that is not how the tax code allocates responsibility. It should allocate equally but exclude from responsibility everyone under 30. They had nothing to do with creating this mess.
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Don’t worry, the fed will switch what is targets and then when things reverse, they’ll do it again
Food for thought.
Historically, the CPI has run hotter than the PCE, which the Fed targets.
That relationship has flipped, notably on core CPI and PCE. The nonfood and non-energy measure of PCE are a full percent HIGHER than core CPI.
Why?
First, are shelter costs, which have cooled. They have a larger weight in the core CPI than core CPI.
Second, are some measurement issues that the BEA is working to improve and will shave 0.2% give or take to Y/Y PCE with benchmark revisions next week.
Third, and most important. The PCE better captures health car costs when they are rising rapidly than the CPI. Those costs are rising so fast that many employers have slowed wage gains to deal with the jump.
We have not seen the gap anywhere near its current spread since 1983.
Those costs are particularly hard for the Fed to reign-in. Instead, it must hammer other more cyclically sensitive prics to offset those increases.
That is more painful than the near immaculate disinflation the Fed laid out with the press conference and forecasts after it raised rates for the first time since 2023 in September.
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Question is not what the market is demanding, the question is what the economics require.
This is still shaping up to be the biggest story of the second half of October.
If these probabilities hold, the market is DEMANDING a rate hike on October 28th, a week before the midterms. Trump will lose it, and Warsh will become the new Jay Powell.
If these probabilities hold, it means the market has lost patience with the Fed's easy policy over the last two years, which is why long-term yields rose during a 2024 to 2026 easing cycle for the first time in 50+ years (see the repost below).
If the Fed sits idle while the market prices in a rate hike, long-term yields could spike off the top of the page.
Of course, payrolls, CPI, retail sales, or Q3 earnings could disappoint, and that probability could drop to well under 50%. But if it doesn't, Warsh might be in an impossible situation.
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Anybody measure the probability that this investment is gonna be 80% worthless? Who knows what other technologies are coming?
Total investment in data centers and related AI infrastructure is projected to total $10.3 trillion from 2025 to 2032, or 3.6% of GDP per year, according to new estimates. That would dwarf other huge U.S. infrastructure projects such as the railroads, the highway system and the plumbing for the internet.
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It was never intended that the Fed totally control, long-term yields. Stable markets should be level independent.
FED MAY BE LOSING CONTROL OF LONG-TERM YIELDS
CIFC says long-term Treasury yields are increasingly driven by forces outside the Fed’s control, including heavy government borrowing, $100+ oil, AI infrastructure spending and a global bond selloff.
Last week’s rate hike reshaped the yield curve but failed to lower overall yields.
Weak demand at the latest 5-year Treasury auction reinforces the risk that yields remain biased higher despite further Fed tightening.
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It will take time for that to happen. Over 30% of outstanding securities have kinder maturity dates. The average funding level will rise.
Of course this demonstrates the incompetent decisions made during the Covid period when interest rates were at historical lows. The government should have taken the opportunity to extend it duration even hundred year bonds were under consideration and probably should have been implemented.
There is also one point that nobody pays attention to there is a portion of the US government’s debt which operates outside the normal market mechanisms. It is the Social Security trust fund, which holds non-marketable security. The fund will run out of money in short order, which means that one large purchaser will no longer be involved. The loss of a large buyer likely push yields up even further.
The 5-year Treasury yield is over 5%. The 2-year will soon follow. Next year the entire yield curve will have a 5% handle or higher. At 5% the annual interest cost of our $40 trillion national debt will be $2 trillion, 35% of tax revenue and a larger expense than Social Security.
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They should all be quiet implement good policy on debt and inflation. The markets will do the right thing. Act stupidly and tell the markets to behave is a recipe for disaster
Bessent is ready to punch someone in the fucking face.
U.S. yields are surging even after the rate hike.
No one believes Warsh and Bessent will actually be tough on inflation.
The same two options remain:
1. Stop issuing long-term debt.
2. Bring on yield curve control.
The bedrock of the global financial system is cracking.
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Because assessing risk in one’s own
Is an essential ingredient of proper allocation of capital and investment decisions. The Fed’s processes made that almost irrelevant. And let’s be clear. If the Fed and US government hadn’t intervened in 98, 2000, 2008, 2020 investors might understand this better.
Fed communications: Many express a desire for less Fedspeak. I don’t necessarily disagree but I am curious as to why? What does less information accomplish?
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How about gets there and stays there. Inflation has been about Target now for 6 1/2 years heading to 2% doesn’t even get to target leave that aside if it starts to move that way fed cups and it goes up what happens then a simple fact of the matter is it needs to get there to stay there for a while?
FED’S GOOLSBEE: RATE CUTS POSSIBLE IF INFLATION HEADS TO 2%
Fed’s Goolsbee remains optimistic inflation can return to the 2% target, provided demand does not overheat.
He says the Fed currently has an inflation problem, not an employment problem, and wants convincing evidence that price pressures are fading.
If inflation is clearly heading back toward 2%, Goolsbee says he would have “no problem” with interest rates coming down.
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I sent a little piece to then-Chairman Alan Greenspan commenting about problems with American monetary policy. One of them was their propensity to raise rate slowly and predictably. The term I used to describe its ineffectiveness was infinitesimal incrementalism.
The fact that people still care about 25 basis points is evidence that they don’t yet appreciate the depth of the fiscal dominance we are in.
Anyway, have a nice weekend.
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Actually, I don’t agree with you, Kenny. It would actually deliver several messages. The first is perhaps the most important it will establish is independent from the president which will be very positive from the markets perspective. The second is that the markets will no longer be spoon fed. The third he is dead serious about dealing with the inflation problem as quickly as possible. Ultimately, this will get things done far faster than sitting around waiting every six weeks to decide what the next thing is going to be. In fact, I would argue he’ll be able to stand. Finally, it will undoubtedly help bring the long and under control.
50? Would scream PANIC & Mkts would sell off. It would suggest complete failure by the central bank and the hammer will fall directly on Kevy but I don't think that's gonna happen
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Warsh did not get into this position. He found himself in a position left to him by Chairman Pao who was bullied by the markets to always leave policy rates too low. By the way, same for his predecessors.
How did Warsh get into this position where the market is bullying him to hike? Clearly energy prices haven't helped, but also:
1) excessive virtue signalling. He didn't need to criticise the record of his predecessor or challenge the "revealed preference" stuff.
2) his FOMC colleagues have been turning increasingly hawkish all year
3) the Jackson Hole speech. Its ironic that when he finally gave something resembling forward guidance he basically tied himself to one data data point. We only asked for a view on the economy...
4) the underlying inflation data. While the MoM stats are patchy and residually seasonal, very little disinflationary progress has been made since Warsh took over. Given the distortions, maybe we should go back to looking at yoy rates!
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How will they respond to 50
Ok. While I am still bucking the trend the predictions are screaming
Kalshi now has an 88% probability of a 25 bp HIKE today — So a 25 bp hike may not be a surprise. The REAL story comes at 2 pm: how will 10 yr yields respond to:
The DOTS.
The DISSENTS.
And WARSH.
😳😳😳
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