DiMartino Booth + McCullough: Fed Policy Mistake? Market Risk Rising

hi i'm keith mccullough and welcome back to  another real conversation with one of my faves   daniel dimartino booth welcome danielle great to  be back with you keith how are you good good good   i have one question that's on my mind all the  time which is is the fed about to [ __ ] this up   uh yes and you could have finished the sentence  by saying by raising or by not raising because   the answer is still yes i mean you you end up in  a position here where it's like you get this late   lagging response to what anybody with a process  you and i included uh could have seen coming from   a long time ago actually i mean we started  calling for inflation to accelerate in june   of 2020 for god sakes but i mean uh it became more  readily apparent to more macro tourist types even   three months ago maybe six months ago uh what  is it about the fed making policy mistakes and   the consistency of policy mistakes that had you  you're so so ready to answer yes to that question   well there's in the there's a little bit of  a story here and i'll make it a short one   in the aftermath of the great financial crisis  the markets were satisfied with the fed coming   in with one barrel loaded so massive amounts of  quantitative easing liquidity programs out of the   new york fed that sufficed i mean it was massive  right we had lehman fall all kind you know just   craziness going on but the fed's programs were  enough to keep the markets on an even keel to bail   out the financial systems to bail out speculators  etc this time when we went into this you might   recall that not qe was not working and the market  was clamoring for more and more and more but yet   the fed was maintaining that the economy was  strong enough and that it didn't need to launch   full-blown qe but what it really was trying to say  was we need an excuse we need a black swan and it   got that black swan but as we've seen with 42.3  percent of gdp pumped into the system via fiscal   stimulus alone there was no single-barreled  approach to resolving what was wrong after   tapering it over taping it over band-aid mandating  it over for a decade after the financial crisis   you needed a double-barreled approach and that's  what's different this time when you deliver money   directly to the people they're gonna spend it and  when they spend it they're gonna cause prices to   increase if you artificially suppress supply in  the housing market lo and behold housing prices   are going to go up as well so even if every single  transitory narrative was to come to fruition   you still have with a five-quarter lag home  price appreciation and rental appreciation   that is coming into the cpi calculus right now and  that is sticky and that's going to be problematic   and that's why you're seeing the unheard of which  is u.s politicians coming out and saying monetary   policy is too loose because they're hearing  from their constituents that rental price   appreciation at 12 14 20 you name the apartment  reit or the single family rental that's publicly   traded these are readily available data you you  name it and their constituents are saying this   is too much this is a third of the household's  budget and it's going up like gangbusters and   there's nothing that powell can do to address it  what i think the political football associated   with that is something that certainly brings in a  new dynamic it always is different but i mean you   get a different political party but you have the  political pressure or the inflation's the football   i mean that's that's a big one and the data is  what it is uh what you said you know empirically   i i want to make sure we set the table for that  because i hear people waxing you know we'll talk   about that too deflationistas inflationistas  they're all theme based long term you're going   to be a deflationista for life or inflationista  for life it's a very sad way to live if you're   trying to generate returns obviously that would  be nonsensical but um on on the empirical matter   which is a 33 percent of the number that they're  going to be staring at guys if you go to slide um   63 what danielle just said is it's an empirical  fact i mean the question that she and i don't have   is specifically when it shoots to new cycle highs  you know so there's a lag to this and that number   danielle as you as you know like up until february  of 2021 has easy base effects or easy comparisons   so they're going to have to keep saying that and  saying that and saying that and at the same time   a slide 63 which is the leading indicator on that  which you also mentioned home price appreciation   is running up uh well new home prices hit new new  all-time highs yesterday let's just start with   that but when you look at it fully loaded ninety  thousand dollars yeah i mean it's like 190 000 you   know so you're it's it's going to be what it's  going to be so this is where i want to get back   to so if if the inflation is what i thought it was  going to be since the beginning of the cycle which   is now going back a fairly long time that the fed  should have acknowledged instead of calling it   and was this the policy mistake being advised by  certain by siders and certainly the sell-siders   and definitely in order they go by side you know  the people that ultimately get them paid in the   end they go to the sell siders or the whatever  the blue chip economist and then they go to   themselves which is the last resort which is the  fed economist but when you think about like those   ones was the policy mistake to call it transitory  because they thought that those three super easy   base effects months april may and june we're gonna  be it i think that that was the playbook that they   were following but again you can't talk about  one without talking about the other you've had   mortgage forbearance okay fine so it's only 1.6  million americans and then this rental eviction   moratorium has had an even greater effect again  if you suppress supply there's no way that prices   are not going to increase to to solve the demand  problem and that's what and by the way there is a   blueprint fannie mae has done all of the work it  is a five quarter lag and we've had home prices   appreciating for multiple quarters now it's  coming into the cpi yeah so okay so let's just   let's just say that you and i are right i want  to i want to go with that option because that's   actually how you get paid this year is to be long  of inflation as opposed to calling it transitory   like i can't go to my accountant at the end of  the year and say well you know these returns   are transitory can we make sure that we don't pay  our taxes you know the fact of the matter is that   they're trending returns inflation's trending  um so how does it work in terms is it is is it   what we already see one by one even the worst of  the forecasters one like when i go through the   order of forecasters like bullard is at the end  of that line at the end of the end of the line   like even he knows that there's inflation at  this point is that what we're going to get   is that we're just going to have the latest of  late cycle fed people just acknowledge reality   well i think we've had more than an acknowledgment  of reality and we have to remember the newest kid   on the block christopher waller he was bullard's  director of research he is now a permanent voting   member on the board i think it was 2002 or 2005.  don't quote me but mark olson was the last time   that there was a dissent on the federal reserve  board that is a cohesive unit and it has been   since greenspan was in office and you're you're  talking about the potential of a regime change   in 2022 and people are not acknowledging that we  have in terms of rotating federal reserve district   presidents everybody on my twitter feed is like  oh they mean they mean nothing really that's true   they're not permanent voters but we have exiting  stage left one dove two neutrals and one hawk   entering stage right are four hawks  who have been vociferously saying   we are behind the curve one of them by the  way is hosting the jackson hole symposium   it is not polite behavior as a hostess last  i checked to come out on the morning of   the the jackson hole uh agenda being announced  later on tonight and saying we should be done by   2022 with this whole taper business we're behind  the curve effectively but that's what esther   george said she's one of the four federal reserve  district presidents rotating in if you can imagine   five descents at the january meeting oh because  that's what you're talking about we haven't had   full-blown mutiny on the federal reserve on the  federal open market committee since bulker was   in office but it's very unbecoming of jay powell  even if his power seat is intact and right now   his power seat is you know i joke about it uh i i  was up talking to a buddy of mine who will remain   uh unnamed up at camp kotak in maine last  week and we were joking that they've got   that they've got clarida somewhere tied up in the  basement because we've only heard from him once   his entire framework was built around inflation  expectations long-term inflation expectations   have come off their ground so you don't even  have the three people in the center vice chair   of the fomc chair of the fed and vice chair of  the federal reserve board you always had those   three powell clarida and williams as permanent  voting members saying we're going to hold the line   you don't even have clarity who by the way  is leaving office as far as we know but again   i think he's locked up somewhere in the basement  of the eccles building right now because we   haven't heard who from him in a long time because  he knows he's going back into the private sector   and that he can't deny his lifetime of work on  inflation expectations that have become unhinged   and you're not yet so we'll get to that uh by the  way on how this is yeah how this has impacted the   people but i mean uh the fact of the matter is  that the policy mistake starts ground zero is that   the fed has an inability to proactively forecast  with any accuracy that should be running any kind   of policy all right so again you can believe in  if you're a big government policy person you would   prefer to have somebody who actually has something  that's accurate uh slide 15 is basically where our   now casts are currently on inflation and the whole  point is that they're sticking and you could have   seen this if you just you know read the bloody  numbers or now casts in real time for the last   six months never mind the last 12. but again you  know these numbers have fours in front of them and   if i take basically what we already just talked  about we take uh because i i now cast right and   you know what that means but not everybody else  i mean so i'm now casting taking incoming data   and then until i get that shelter that you know  component or oer component of of rent until i   get that actually reported 100 basis points higher  danielle i can't take my fourth quarter number up   you know what i mean but i can front run it and  that's what markets do markets have been front   running the fed on inflation the whole time so the  policy mistake starts with they have no ability to   to to forecast then they do it on a lag they saw  this coming keith there's an undeniability about   the fact that jay powell is from the private  sector he knows what was coming he saw the   whites of the eyes of the credit markets and got  totally freaked out in 2018 and that has that's   what's caused this look if you go on the federal  reserve's main website it says that the federal   reserve is mandated to make policy in the public  interest they could have said a long time ago you   know what these mortgage-backed securities  purchases are doing more damage than good   you know as bullard said this morning you know  your your middle low-income people cannot afford   to get into a house or an apartment and they  could have they could have throttled back on that   40 billion dollars a month in mortgage-backed  securities purchases a long time ago and the   signal would have been you know what we're still  somewhat independent and we know what's coming   down the pipeline we're going to keep 80 billion  dollars a month in treasuries going so the markets   don't totally freak out but now it doesn't matter  what they do markets are freaking out period   mm-hmm well okay so let's play this out in  terms of okay we've laid the groundwork like   who the players are what their problems are as  forecasters but the policy mistake itself tell   tell people if i'm crazy or not but you tighten  into a slowdown i've seen this many times and   that's exactly where we are if they start to see  that core inflation is rising and they feel like   they have to rush to play catch-up while they're  trying to you know i think goldman sachs said 15   billion a month something very nice and polite but  if they feel like they have to rush into actually   raising interest rates and they're in a situation  where they're double tightening markets don't like   that and you're right once you inflation adjust  the quickly receding gdp forecasts you're talking   about the potential for negative real gdp here  nobody's anticipating that but on this you know   you mentioned blue chip economists they've all got  these forecasts for growth going into 2022 but not   a single one can tell me where that's coming from  absent another stimulus check actually if we do um   and i want to actually just go there um fiscal uh  if we've been doing a lot of work internally and   talking with our institutional clients about this  and it is finally the the mother of all cliffs and   that is inclusive of having a i would call it a  rosier or more left-leaning infrastructure and   fiscal spending plan if we go with your view i  mean i i actually don't know how bad my number   can get in the second quarter of next year  u.s gdp is going to be a certified train wreck   and the fed according to buller bullard's that's  precisely when they want to raise interest rates   in theory that's when they want the taper to be  ending i mean what you're saying they're talking   about tightening into a slowdown i think i think  the second quarter of 2022 might be ambitious   because you can't tell me what is going  to happen on the by the way september the   4th when these unemployment benefits run out  people have run the map they're anticipating   an 80 billion dollar hit to consumer spending  almost immediately yeah and again we're already   seeing if you follow this website that i follow  daily jobcuts.com it's easy enough to follow   you're already seeing layoff announcements come  back you're seeing manufacturers lo and behold   look for overseas ways they're heading to mexico  to do their manufacturing they're not going to sit   back and take input price pressures forever and  and just be told that they're transitory they're   going to figure out a way to cut costs they're  going to accelerate they're going to accelerate   automation this is like the boogie man nobody even  wants to acknowledge there's going to be a need   for fewer employees than there were pre-pandemic  because great big companies who've got this thing   called shareholders to answer to have got to  figure out a way to cut the biggest potential   variable cost right now and that is labor and it's  moving all over the place that's a super important   point i mean so again we've talked a lot about the  inflation of things if you go to the labor cycle   like if my model is right we're going to  have what i call quad 2 or accelerating   labor reports all the way through into september  october once we lap all these you know handouts   and getting people off the couch getting people  you know getting kids back to school but and so   it's going to be like really hard for the  fed to sit there and get these cpi prints   and again jobless claims hit a new cycle low  again today and again i'm not saying that this   is going to happen in next year i'm saying that  the policy mistake happens in not understanding   at particular moments in time when these  things all hit at the same time that that's   how we measure and map things fractionally we  don't do the average of things or some bloody   fed forecast of things the jobs numbers are  going to be good no potentially rate i mean   certainly through jackson hole commentary  but um you know into maybe the fall   it's it's it's conceivable uh we don't know i  mean the thing that we don't know most about right   now again is that you don't have four sequential  months of declining real retail sales we learned   from cox automotive yesterday that we will have  the lowest print since june of 2020 for car sales   we're going to have a fourth straight month of  declining car sales by a half a million units per   month these are huge moves and again everybody's  afraid to talk about the fact that so much demand   so much spending was pulled forward that there's  not much on the other side you can talk about   the fiscal cliff all you want but what about the  demand cliff yeah from households yeah that i mean   that i again it's the base effect stupid anyway me  being the stupid person um but again once we get   to q2 of next year it's mathematically impossible  to see anything other than decelerations it's the   most it's it's the it's the best base effect in  the history of mankind so um okay so look now now   the deflation nieces are like oh so danielle  and keith they agree with me in the end yeah   if you missed two years of freaking returns  you miss inflation cycles every single time   we have them you're eventually going to be right  because the fed makes you right that's the point   and that's the thing and that's the reason that  we're seeing such reticence with the 10-year yield   because just you said it markets are looking  forward and the 10-year yield right now is   broadcasting stagflation yeah and that's why  people are like i can't understand why the yield   curve is not steepening i'm like well dumbass  it's called stagflation go google it it's from   the 1970s if you weren't around but that's the  case and people don't know how to factor that into   10-year yields going to rise or fall it's not that  simple or elegant that's not what stagflation's   all about no stagflation is a compressing yield  curve i've said this six six ways to sunday and   it's gonna be sunday again soon because that's the  thing about sundays it keeps coming and that's the   thing about time and space and that's the thing  that people screwed up in the 1970s if you go back   and you look at the yield spread tens twos in the  early 70s all the way to 1975 like what did you   see i mean you see exactly what's developing right  now and now my question really on that like once   we get out on that duration which is a couple  careers from now for me in p l terms like you   know i don't just like trade whimsically on buying  long-term bonds um until i get to the right setup   for that but again once we get there it's going to  be a really interesting thing because the fed is   going to i would say my my if if my outlook here  is right by q2 of next year the fed's going to be   cutting interest rates and and doing everything  all over again now that is going to be a sight to   see that'll stoke inflation back up again so it's  going to be really interesting to watch all the   moving parts it is keith but we're not talking  about the elephant in the room and that is the   the complexion of the 3.5 trillion dollar spending  bill the fact that nobody's talking about the debt   ceiling and that 46 gop senators have already  signed on to not raise the debt limit at all   they have nothing to lose in these negotiations  because they have their eyes set on the midterms   and and again the thing that people are not  talking about and the thing that jay powell   is starting to recognize right this this entire  situation in afghanistan was not free and the   u.s checking account balance started off at about  300 billion dollars you've got the rental eviction   moratorium carrying through to october the third  you've got tax child credits that are being paid   out in cash what if janet yellen gets a knock on  the door on october the 1st and says hey we've run   out of cash we're overdrawn that's not what she's  expecting she's expecting to have leeway through   halloween but again look at mitch mcconnell look  at his comments look at those of other republicans   why would they be even beginning to sign off on  a three and a half trillion dollar bill that's   based on soaking the rich raising corporate income  taxes providing us expanding the social safety net   that's never going to be uh shrunk again these  these programs are only created they're never   destroyed all in the name of buying progressive  votes what gop senator is going to sign off on   this and why wouldn't they let and i'm going to  throw something out here that i'm about to blow   up all of hegei there's a blueprint that was made  in 2013 that explained to bernanke how if need   be post-government shutdown the treasury could  strategically default on treasury holdings at the   federal reserve try me mitch mcconnell might say  try me and none of this is being factored in again   while the debt ceiling is not raised you cannot  issue a single treasury bill note or bond oh boy   oh boy now the market's actually figuring this  out it's a really interesting thing to watch   it manifest and again so many people when they  talk about long-term bond yields it will never   cease to amaze me but they they're going to have  this long-term outlook and they miss all the real   particular moves that matter in between and for  that to happen danielle in between uh there is   actually our washington office these guys uh jt  taylor i know if you know him or not but he was   saying the other day he's like well first of all  they were in in pelosi's office till like 12 30   you know 12 30 in the morning on monday which is  totally screwed up for the end of august that like   never happens um so you have like all these  and what he said was and now they're leaving   they're going to come back and we're going to  have like a very deep slate intense slate of   fiscal policy uh votes starting september 27th  something you know thereabouts at least you know   end of september and he said it's going to be it's  going to be like as busy as anything you've seen   and i guess if your view is that it's going  to be a lot more dangerous than anything   you've ever seen then i know what i i need to do  with that well okay so they're going to be busy   but on the other side of the aisle they're just  going to be watching and exactly yeah try me no   matter what you throw my way try me because i've  got my eye on the primaries and the midterms and   i don't mind seeing this government shut down i'm  fine with that and that's again that's september   the 30th right okay so how does um so at least  we're in the same week in terms of a catalyst and   it's super important for those of you out there  i mean okay it's one thing to listen to danielle   like educate you on all the different players and  where we think stagflation is and what the policy   mistakes could be but please have a macro calendar  catalyst in your process so that you know like   what you're looking forward to as opposed to what  we're looking behind at you know that's just like   i'm just trying to give people one-on-one i've  realized this year danielle that not everybody   knows you know basic stuff like that and i'm not  trying to you know talk down to anyone it's just   it's an important way to here ago i wasn't some  expert on the on the on the congressional calendar   but it's it's bookmarked it has to be  a bookmarking kind of an environment   because you have to know what the players are  what they're doing especially with mrs magoo   running treasury oh that okay so let's do let's  do her okay so uh janet yellen that was very   disrespectful i apologize the mother of all i  you don't need to apologize on this show i mean   the mother of all doves let's just say again  it's it's an argument we're making here and we   didn't uh by the way uh coordinate arguments  we're just having a discussion like we would   and yeah let's say we're right and what  is she gonna do the most recent comment   is she she likes mr powell does she like  mr republican pal going into that setup   she absolutely does and she has been really  surprisingly machiavellian in keeping his name   this is this is actually i'm going to step back  and and compliment janet yellen the last thing she   wants is discontinuity in the markets she wants  for for market players to believe in the power put   and not have to wonder what happens if  lael brainard comes in with her eyes set on   facilitating enabling mmt modern monetary theory  because that's what you've got there so for for   yellen to be less dovish than she otherwise would  be in favor of powell shows you how frightened she   is of these financial markets and she's no steve  mnuchin and that's not a political statement   it's just she's a labor economist we don't know  that she has the ability to launch not qe if   there's a disturbance in overnight lending markets  i don't know that she's that market savvy um now   now there's where you always do this to me you get  my you get my explicit attention you had the right   side of my brain going to republicans are going  to go there and then i was trying to remember   what powell's party was but then i forgot that  over here on the left side that the left and the   right are the same when it comes to money printing  and fed policy it's the same thing they both do it   it's not it's the same thing i mean that's why  there is this massive discourse going into jackson   hole right now powell is looking after his legacy  bizarrely enough janet yellen is helping to ensure   that that powell's legacy is a longer one than  hers is that he's not a one and done fed chair oh   boy and i mean but but there's no reap j pal's got  too much money his net worth is too big for him to   be willingly signing on for another four years if  it's not his legacy that he's trying to safeguard   and if that's the case you cannot  have the the stock market crash   okay he's desperately trying to thread this needle  while he's facing mutiny on the fomc in january   happy new year chair powell so so you're saying  that he's probably not going to accept even if   she wants him no no no no no i i'm i'm telling you  he wants his his legacy he wants or he wouldn't   be bothering to do this he doesn't want to be a  one-and-done chair he wants to be re-nominated to   have the the confidence of multiple parties blah  blah blah blah blah oh just uh just this you know   i i love our council internally i mean i have a  lot of good friends that are lawyers but to have   you know have somebody you know lawyer run this  thing for eight you know for so many years it's   and it's going to turn into the bureaucracy  i guess that it's always been but there's   no is there any case here to be made hawkish fed  members or not that his legacy isn't going to be   just completely tattooed with money printing  and liquidity whenever the market needs it   no i don't think you can ever undo grandfathering  in triple b credits that will always be his legacy   on the street always it'll always be his net  worth everything that every where he came from   that's all that that is he did uh modify main  street lending program in order to accommodate   private equity portfolio companies but i digress   p e powell as somebody affectionately calls them  it's a it's got some great alliteration there   all right so you're not a fan of fiscal spending  anyway um what do you think not at this juncture   you're keeping people out of the labor force  keith you're keeping people unnaturally out of   labor force when you do this to an individual  and they have skills atrophy that means that   if they wake up one day and they're like you know  what i've changed my mind i want a higher income   all of a sudden they're not hireable so this  is massive long-term damage to the productivity   potential of the us economy keeping people  out of the workforce so no i'm not in favor   yeah i i'm i'm not either if you look at slide 40  um guys this income cliff or payroll catalyst that   we talked about like it's you know understanding  what you just said and understanding just the   mechanics of unwinding it you know that's that's  really the only upside left in the jobs market um   so you know that's that's something that we're you  know and we'll see if we're right but you've also   got you know you you also had de blasio of all  people uh demand that the new york teachers get   vaccinated and get back into the classroom so you  can theoretically unleash millions of parents who   have been shackled to their kids virtual learning  environments at the same time that you release   whatever we've got eight and a half million  people on on these gig contract 1099 worker   type of unemployment program so there is going  to be an influx uh of workers into the labor pool   now i know you always have comments on this  and now that you're back to traveling a lot   from what i understand at least that's what hello  from santa monica yeah here in santa monica she's   in california i think you're having a i think  you're having a discussion with gun lack today   or is it tomorrow i believe so yeah you let me  go first well you're on east coast time i'm not   must be the time zone thing i appreciate that  thank you very much but when you look at um   i know you have a lot of thoughts on this on on  how fed policy stands against uh you know the   needs of the people and i'm not talking about  people like you and i'm talking about people   that are on low income to no income and and and  today you actually had bullard say it like is it   is it how long's it been since the fed has taken  some level of accountability with this i mean i i   could i was i was quite taken aback by that again  it was his second in command christopher waller   who came out on a bloomberg interview in the  evening and and derided the white hot housing   market this was months ago and if you've been  advising somebody for the majority of his career   then you're going to think the same bullard  has been surprisingly hawkish and consistent   for a long time i mean the robert kaplan situation  that's a known known we get that but again you're   seeing some some unlikely suspects who are  jumping on this bandwagon because the fed's   policy is doing such untold damage to and somebody  on my hats off to whoever came out of my twitter   feed today and said you know shame on bullard  for saying low income that that the fed policy   is hurting low-income workers because what about  the middle income workers that it's also hurting   very badly and that's true that's true if you  think about about single-family new leases being   up 14 year-over-year and you're a middle-income  family who doesn't want to buy into these high   home prices but you want to live in the right  neighborhood so you sign some massive lease to be   in the right school district and lo and behold 10  years later you know what you've never signed up   for that you've never been able to save up for  that down payment this is not just hurting the   low income earners but it is also helping hollow  out the middle class or what's left of it isn't it   amazing that how old do you know how old's waller  i'm assuming he's younger waller is a bit younger   yes i mean i i've only seen him he's kind of  like prematurely great a little bit like you   thanks thank you uh you're looking younger all  the time by the way that that that that makes   you distinguished right isn't that the rule book  i i think that's what you know my kids might say   like to be nice to me but um now regard i mean the  reason why i asked and some people are triggered   when you say younger you're talking about me a  millennial um it's just you're younger so you may   have like noticed things that older people who are  looking at it dogmatically may have not noticed   now isn't it amazing if you look at slide 66 on  this rent thing that waller may have looked at the   fed's data and said hmm like what does this chart  look like this is rent price expectations one year   ahead according to the fed servant right it's not  like it's not like you have to wake up with this   glorious moment as waller the the man rising  within the ranks of the fed forecasting system   i mean the numbers how many bars are in that chart  i mean forget how many bars there are just look at   where it came from just look at the history look  at the long-term history of the thing and it goes   you know just goes vertical that's and again to  your point and how how poetic is it that it's   fed data it's alert it's like it's it's on the  internal hot button hello here's a uh slide 56   i got a lot of this eye candy for you because uh  it's not it's not just uh it's not just danielle   you get to look at you get look at this i can't  look at this transitory like they say transfer   do you can you see this chart danielle this is  the inflation's i can't see the chart but that's   why they've got clarita locked up in the dungeon  well it's i mean it's just uh oh here's one more   from the fed this is this is a beauty where is  this thing uh i know i have it in here somewhere   it's gotta be come on guys show me the feds  now cast for inflation that their own now cast   where is that thing you guys pop that in  there please the federal reserve's now cast   for inflation dig dig deep into the macro deck  and find that but it's i mean it it's their own   now cast and it's a shitty now cast but it's  on a lag and it's it did too so you know those   things that's why i always say to people like you  know the buy side's interesting here's another   question for you before i take other people's  questions which are uh obviously important but   the buy side has really been a a culprit here too  i think if you look at the the streets positioning   okay so cftc futures and options positioning  to me is the positioning of the market   um guys pop that up there i'm sure you have that  ready you know the street kind of came into this   most recent move in the bond market danielle  they're they're they're basically long the   dollar and long treasuries across the curve that's  expecting deflation right that's what deflation is   dollar goes up the prices and dollars go down  bonds rally you know they just got completely   hosed this week on this move what do you think  about it and moreover what is the feedback you get   from your clients and big institutional managers  on that because you'll talk to like you said gun   lack today well so i i think that what's not being  taken into account is the real time on the ground   slowing of growth and quickening of inflation at  the same time again i don't know that your average   buy-side manager is capable of looking through two  prisms at the same time and that's what you have   to do in this environment and when you're talking  about printing money to to get your way out out of   situations and again you've got the situation in  in afghanistan that you know nobody's put pencil   to paper but it's not free what's happening right  now all these emergency measures and again they're   not looking at the treasury general account  held at the federal reserve bank of new york   they're not looking at that balance coming  down hmm that is um that's par for the course   you know it's like um do you think they're so i  always ask you this but is there ever a chance   like like just a small chance that the policy at  some point is affected by discussions like we have i think it will be affected by force because the  fed may have intentions the fed may as goldman   sachs has dictated oh did i say that may intend  to start tapering in november or december at   15 billion dollars a month but the fed cannot do  anything as long as politics are front and center   and that is like page one of the fed if there's  a political situation that's that's that is going   on in in in congress and you make any move any  kind that could be construed as for one team or   the other that's a big no no your hands are tied  until everything is resolved and again this is   not being taken into account by the street  whether it's the buy side or the sell side   yeah the reason why i asked that i mean like  somehow you and i are up to almost uh i don't   know four or five hundred half a million people on  collectively following you and i on twitter i mean   a lot of people a lot more people paying attention  than when maybe official dumb or the establishment   at the fed would have ever envisioned um so a lot  of people pay attention and i wonder like you and   i are basically saying okay look you're going to  blow the whole thing up one more time and then you   got to come all the way back in and do it all over  again that's basically what we're saying correct   we are but don't forget the midterms don't forget  that a single-barreled approach resolved the   financial crisis a double-barrel approach resolved  the post-pandemic again credit market blow-up   you're starting to see high yield you're starting  to see how yield spreads tick up for the first   time since march 23rd 2020. right so again where's  the double barrel coming from heading into the   midterms if you cannot load up both barrels that's  a good point what i'm trying to say keith is   so what if the fed's going to come in and do  everything they can to address stagflation   after the fact or behind the curve if they don't  have the fiscal authority with them every step of   the way to the same magnitude that they have  in the past 18 months it will be ineffectual   yeah i remember uh i remember when there was only  a single barrel and oil went to 140 bucks while   the economy was stagflating and the world as most  people an official them thought that it would go   ended that's called 2008. that was a sing you know  single-barreled approach that the you know that   hank the market i used to call him hank the market  tank pulse and i we kind of come up with a cartoon   for everything you know but i mean the fact of the  matter is that that's what happened they couldn't   get the other part of the barrel in that's right  and bernanke spent most of his career begging   for the fiscal authorities to step in  and just give the guy a helping hand   and but this time this time powell got it and  then big time but markets never want a smaller   mandate ever drug drug drug addicts don't  need a smaller dose they need a bigger dose   and again you know november the november 2022 is  closer than we think yeah and the republicans are   still bitter about having lost the senate and  they only have to gain four seats in the house   this this is theoretical child's play but what  i'm saying is your fiscal unless unless we have   a full-blown meltdown in the u.s economy  it's going to be difficult for me to see   members of the gop signing up for some huge  fiscal type of emergency type of plan well   that's that's why my question like when i was  thinking on the right side of my brains and what   was going with powell and why janet may in the  end not like him as much as like you're saying   like look he's just in the seat because to get  uh and i haven't asked you about this either   and then i'll get to other people's questions  but you know to me the mecca the mecca for mmt   is getting lyle brainerd in the seat with janet  yellen that's right so the fact that she came out   she already leaked the story a few weeks ago that  didn't do the trick yellen leaked her backing for   powell weeks ago yeah that yeah i didn't see that  didn't quite do it so sunday night she came out   and you know and then the wires it's official  janet yellen has told the white house she has   informed the white house of her backing for  jay pal she's like okay are you listening now   so it's very real and you've got vegas betting  odds at 82 percent that powell gets reappointed   and i don't typically quibble with vegas not when  it's 82 to 12 cents did she just get would did she   just get back from asia before she said after like  was she in asia did i have that right i don't know   i i think she took her first trip ish because if  you go to asia you're like holy [ __ ] this is   stagflation like in china like this is bad right  and exactly and they're sitting on stockpiles of   commodities they don't have it near as bad as i  mean at least they've got backup supplies yeah   and they've been releasing them aggressively  while sitting on their empty containers that   were deadheaded in mass from the three big ports  on the west coast sent back to china empty and lo   and behold we have a container crisis yeah that's  i'm long that container crisis i mean that's it   there's so many ways to be long of inflation it's  it's basically become a running joke for anybody   who has been long inflation that other people  call your portfolio transitory anyway let's   go to um uh the queue i got number one question  is actually interesting on on dollar evaluation   do you believe the fed will be for forced to  devalue the dollar against gold at some future   point what other realistic options is the fed  going to do other than the value of the dollar   the fed's never devaluing  the dollar you don't think so there is there is precedent but i mean you don't  exactly i mean you're asking me if the fed's going   to raise a white flag no i i'm not asking rich is  asking his name is rich and by the way rich it's   not necessarily the fed's decision either that's  there's another department up there well there's   that that's actually you know the mark you know  i call them floki the market gods you know like   it's it's you know when the dollar goes up rich  that is the world saying oh [ __ ] we got like   we got to go to cash this dollar denominated that  problem globally there's way too much of it you   know things deflate because of the market system  we've created you know that's that's a big when   you see dollar strength in this environment that  is seriously this is this is corleone going to the   mattresses when you see dollar strengthening  in this environment yeah that's uh that's   a good i like that going to the mattresses  all right uh what can trigger the fed from   losing here's an interesting question i get  this a lot i don't know what the answer is   uh what can trigger the fed from  losing control over bond yields anyway i think that that's probably the most  critical question that you can ask right now   because in in theory because  we have this flattening bias   you could make an argument for the fed having  lost control right they launched not qe because   the twos tens had been inverted for 90 days plus  and the overnight lending market was starting to   go nuts again if you want to look at the move  index i wish we could pull that up quickly   yeah we can't we go through it every morning it's  kind of interesting like cnbc will have like uh   i don't know some dude talking about a  spack and this is what we'd go through first   it's a little less exciting but a lot more  relevant um yeah the move moved to almost 65   yesterday five yeah so it's definitely something  i'm keeping my eye on it's not a direct indicator   of credit market risk but it is an indirect marker  of credit market risk and we we went into february   the 18th 19th whenever markets topped that's when  corporate debt kind of court the corporate bond   market crossed this 10 trillion dollar mark  and now we're pushing 11.5 trillion dollars   so there's a lot more to deal with so i think that  it's you have to pay attention to credit to get   an indicator for when the fed could truly lose  control of the rates market yeah yeah the short   end of the curve has been first of all the move  index is more you know more constellations around   the short end than the you know 30-year type long  end um but again it's it's on a historical basis   it's one it's breaking out as it should uh during  either quad uh you know quad four or should see   quad three stagflation uh but two it could go a  lot higher uh and that's when you know when you   lose control that you can see that in the move  or treasury bond market volatility moves that's   the move index moves we actually had the creator  of the move index on for a real conversation um   uh the other day uh and just to show you how  tough this game is danielle he created the move   and his call was that the curve was going to  steepen and mine wasn't going to compress so even   the creator think about that the creator can't  get the shape of the curve right all the time   well it's a it's a gauge of volatility it doesn't  necessarily tell you which direction bingo all   right uh here's uh here's another question and  this is like um this is a ddmb i like that ddmb   uh jim uh in new jersey thank you for sharing your  monetary monetary policy expertise uh read the   feds money printing any idea when we get that toto  pulls back the curtain on the wizard of oz moment again yeah i mean in my call me hyper focused  but the answer is yes uh you know it was   we started to see just follow your triple c  spreads you saw triple c spreads tick up in in   2018 and they didn't come down until march  the 23rd from a very uncomfortably high   level and if the credit market ever begins  to unravel and nobody thinks this can happen   but if it ever begins to happen then you've got  issues remember pat toomey made sure that in the   legislation that was passed on december the 27th  that the fed does not have the legal authority   to flip on the credit switch the credit facility  switches that they used to they didn't buy a lot   of bonds but they didn't need to all they had to  do was say we're backstopping the credit market   toomey was making sure that they couldn't flip  on the municipal bond facility but nevertheless   it applies to the off-balance sheet treasury  federal reserve credit facilities that bailed   out the credit markets it's illegal for  janet yellen to just go flip that switch   she has to come up with a different reason  yeah well i mean that's that's the one thing   that's consistent they'll they'll try you know  come up with a different reason but um okay   cool uh we have a canadian question i i i love the  canadians of course reg in toronto many believe at   some point the market will get crushed yes no  one knows when da da da da what's your opinion   on how much effect um congress 5 billion in  spending will have on forcing the fed's hand   thanks for organizing this and for teaching  hegi nation subscribers nice for the thanks   for the compliment rich well reg a i think that  the savviest players in the gop have signed on to   the bipartisan infrastructure bill because they  know that the three and a half trillion is not   coming behind it so i think it's a very dangerous  assumption to to have and again that could still   be very problematic for the fed if the fed wants  paper or needs paper to buy and all you've got is   550 billion in new spending spread out over eight  years that that's that's nothing compared to a fed   that was that was blowing up its balance sheet  uh in the very beginning of the bailout process   uh yeah i mean i think if there's one thing that  you've put in unique focus as you always do with   with specific timing it's it's it's those  dynamics um you know with this political   dynamic especially it's just not i'm just  not i'm no good at that i just thank you for   getting me uh on to that train of thought by the  way keith i'm to play socrates to you for just   a second even if it was three and a half trillion  dollars is it the same as giving most of americans   1400 in cash or covering a vast you know a large  chunk of renters 25 of of renters in federal   programs giving them 1800 a month in stimulus  people have to keep in perspective the form the   stimulus took the form the stimulus took was money  directly injected into checking accounts of of   of us households that's not what they're talking  about with these social spending programs so it's   dangerous to equate even if we get to four and  a half trillion four point one trillion whatever   it's dangerous to equate that with what we saw  in the past 18 months with stimulus check 1.0   2.0 and 3.0 yeah what it created i mean guys go  to slide 44 i mean you know all that money is in   excess savings right now you know so you have  like it just it's there you know it's different um   ninety percent of that excess savings has been  drawn down yeah that's that's the stag in in   stagnation it's that a lot of that saving cushion  has been drawn down a lot of the residual and   what's left is people who are 65 and older good  luck with them well how about the um how about   all the rich folk on wall street and and uh you  know this is this is what it is this next chart is   kind of interesting too uh very interesting or we  wouldn't show it slide 45 which is you know this   is luxury goods consumption you know pleasure  boats buying airplanes watches stuff like that   and just ripping right there's the drawdown gets  goes from your account to buying [ __ ] right and   that's the point you can't go buy a pleasure boat  right now in westport connecticut you're going to   pay like you're going to pay the same price that  somebody paid for the same boat 15 years ago and   they used it for 15 years so keep riddle me this  because i'm really going to twist your brain now   riddle me this every week we publish at  quill intelligence every week we publish   some aspect of the langer consumer comfort index  which used to be the abc weekly index which   became the bloomberg but every week we  published for the last five or six weeks   what cohort of income earners would you  guess has had declining consumer confidence   uh poor people the wealthiest really  those making a 100 000 or more   have had declining consumer comfort  while other cohorts have been rising   for a very consistent amount of time these are  people who are in the markets who are saying   wait a minute something's going to give something  has to give and that is you know your top   20 of earners account for more than 40  percent of u.s consumption which accounts for   two-thirds of the us economy they're  uncomfortable and they have the wealth so   whatever is percolating in the markets  right now is really getting the wealthy   nervous yeah if i take uh and of course consumer  confidence broadly and it's been impacted by that   of course has slowed so you you know that part i  knew i didn't know that that cohort obviously but   i if you overlay that with the peak and small caps  or the spac bubble which is one in the same thing   i bet you i'm bet i'm betting that the the  people with with with the real nuts felt   super confident when that when that peaked uh  which was about june and has subsequently you   know started to say oh [ __ ] i can't bill ackman  i can't i am not the smartest person on on the   earth i i my spac didn't work and we haven't  even keith you haven't even mentioned delta   and i'm not saying the economy revolves  around a virus but i personally know five   people right now who are fully vaccinated who  are dealing with the coronavirus breakthrough   and they're seeing what's happening in israel  and they're seeing what's happening in the uk   and again they're the ones with the savings  and they're the ones with stock holdings   and they're not too terribly impressed with  whatever's happened to their personal health the   nra for god's sake canceled its conference the nra  give me a break that's the last that's the last   convention that you would expect to be canceled  last minute and yet it was so there will be some   detrimental effect these conferences are  not rescheduled and you can't you can't   give that money back to the services sector  once 2021 and 2020 excuse me 2020 and 2021 are   successfully cancelled so there will be a  follow-on a knock-on effect to growth because   of this again because it's affecting people with  money well real grow the real growth rate let's   just start with the fact that real growth slide 13  guys is going to get cut in half it just already   did we're two-thirds of the way down in the  third quarter the third quarter number is going   to have a six in front of it instead of a 12. on  year-over-year basis so again um yeah so that's   that's the new york fed's now cast is even lower  than that and it keeps coming down because if you   look at the citigroup economic surprise index it  does not look to the bueno even today's jobless   claims were higher than what we'd expected jobless  claims should be crashing right now crashing   well on a trending basis they're they're at the  lows i mean if they're absolutely coming down but   they should be coming down much more quickly if  we've got all these people that are getting one   more week of supplemental unemployment benefits  yeah um here's a question from your home state   kevin from dallas tejas the man from texas wants  to know how do you see the fed unwind this is a   plumbing question if you don't have any i bet you  do have an answer geez it just jumped on me that   thing just jumped up in the queue right when i was  reading it guys how did that work look at that uh   yeah where's this question again about it was  about repo um here it goes uh how do you see   the fed unwinding the reverse repo market  that has significantly grown since march   i don't think they have a desire to unwind  it i think the fed is very comfortable and   in fact the fed feels that its power seat  has been reinforced by being the alternative   provider of of liquidity in the market i i think  we could easily see the reverse repo facility   towards the end of october creep up towards  two trillion dollars it would not surprise   me at all and there's already discussion about  raising the cap for individual money market funds   so the the thing that market participants  have to pay attention to is picture a bucket   the fed is trying to fill up a bucket with  water with 120 billion dollars every single   month but if you've got a trillion plus coming  out through holes in the bottom of the bucket   even though it's only on a nightly basis but  it's if it's every night it starts to become   a thing right yeah if it if it's every night you  start to call it a monthly phenomena a two month   three month but they're they're they're they've  got two operations going on at the same time that   conflict with one another and what you don't want  is for the market to begin to perceive that the   reverse repo because it's static one trillion  every plus every night is a form of tightening   that's what when the plumbing becomes problematic  yeah that's a really good uh image of how this   uh this works and again simplifying the complex is  not easy until you understand all the parts and um   we have a cartoon somewhere of a raft fed  policy is like everyone's safe on the raft   until it's like your point starts leaking uh or  the holes are in it and then you know voila uh   john from arkansas this is an interesting question  i do not know the answer on this obviously or i   wouldn't uh pick it um do you have any do you  have any intel update on fed coin crypto timing   i don't um they're they're coming out with a  white paper i i think that they're they are uh   on their own coin or like on coins on some form  of central bank digital currency and this has   been put upon them by the administration shall  we say uh but you're not seeing the efficacy out   of china that would really push the fed to  accelerate its plans and again this is the   mechanism through which modern monetary policy is  facilitated this is the lacy hunt nuclear option   if you have a a federal a central bank digital  currency if you have the ability of individuals   to have accounts directly at the federal reserve  you've just basically negated the conventional   banking system in the country there's no reason  for it to exist beyond investment banking   so but if you do that then you have a mechanism by  which to deliver socialism directly to americans   you'd have to open the federal reserve act  to actually do that but you would render   fed liabilities legal tender and deliver money  directly to the people you wouldn't even have to   pretend and say you're not monetizing anymore you  just would flat out be a conduit for the treasury   and there is some part of jay pal that's still  the lights on and somebody's still sort of home   and he knows the slippery slope and he's  friends with bankers who really don't want   to be made irrelevant so well that's the  thing on this i mean because you're your   fairly ardent stance here is that he's going to be  around for a second act and and i guess that that   would be a headwind for for legislation wouldn't  it it would be a headwind for socialism so in   that sense okay yeah okay well if i start with a  couple minutes left if i start getting you going   on socialism we're going to be here for a while  but um i know you have a schedule here's a maybe   this is a good good one to ask you is the last  question uh tim and st louis i think it's a really   interesting question from a behavioral perspective  um so you ask does pride run so deep at the fed   ddb that they'll crash the markets knowing  everything that we just talked about i think that the fed has its  eyes on more than one prize   and losing control of the rates market is  worse than a big stock market correction   having their hands tied by politicians is even  bigger in terms of we never do this we're the fed   if you're asking the more basic question  does pride feed into policy-making   and if their models tell them that if we do  this the stock market's not going to crash   and they you know and the stock market crashes  anyways they're still going to come back and   tell you that their model was correct there was  just some kind of a flaw in how markets react   but they'll still they'll stand by their models  all day long it i call it the model call and they   will stand by their models all day long they'll  go down with that ship but again people need to   understand that the fed is never overtly political  it will not step into this [ __ ] show called the   debt ceiling that nobody's paying attention  to and it won't get in front of it no matter   what inflation's doing no matter what the stock  market is doing until the politics are resolved   the fed's hands are tied yeah i think of it  uh i don't think of it as fed pride i think   of it more as cya like fed cover your ass now  like you know i to me that's the whole point of   being policy makers that are late and lagging  you eventually have to succumb because you're   again you're trying to cover your ass true  it's just sometimes your ass gets really big well if that if that is not the way to end what is  uh it's august but it's a very timely and topical   conversation i know a lot of people really care i  mean obviously we're going to get the the schedule   of speakers here imminently tonight i guess and um  you know you just gave them a ton of context and a   nice timeline to think about everything so thank  you very much for that great to be with you keith   thank you thank you and she is the one and only  ddb please follow her on twitter she's a beauty you

Channel: Hedgeye

Views: 100,510

Rating: 4.8122172 out of 5

Keywords: finance, wall street, markets, stocks, trading, macroeconomics, hedgeye, keith mccullough, bloomberg, options, day, danielle dimartino booth, jay powell, federal reserve, monetary policy

Id: PXfh8MIqT48

Length: 57min 57sec (3477 seconds)

Published: Thu Sep 02 2021