Public Pensions & the Trolley Problem — The Impossibly Immoral Choices the Future Holds

Forget about the snowy spring weather you’re trying to avoid up north. It’s tornado season down south, that special time of the year you tune in to the local news for a quick check of the weather before heading out to battle the masses on the highways and byways.

As coincidence would have it, a story covered on that same local news station stopped me dead in my tracks. Kaitlyn Smith, a resident of a Dallas suburb, was off to visit her 90-year old grandfather. After parking our front, Smith noticed something was decidedly missing from his open side yard, as in the concrete slab was there but the 100-plus pound air conditioning unit had been ripped off its foundation, while her grandfather was at home.

It would appear that the word is out that the CRB Commodity Index has soared to the highest since October 2015 though it’s doubtful most thieves have Bloomberg terminals within reach. Nonetheless, the shocking story reminisced of the heady days of the last housing boom when vacated houses would be harvested for scrap metal of any kind.

The contributor du jour is nickel which is up by more than 10% on concerns that Russian sanctions put Norilsk Nickel in their crosshairs. Add this to the list of metals from aluminum to copper to steel. And of course, we’ve seen a surge in oil prices which is bound to bring joy to households nationwide, or not. Look for a spurt of anxiety the next time a confidence survey is released. Pump prices bleed through to inflation expectations faster than any other factor, and with good reason as it often means no family meal out that weekend.

For the moment, investors remain in a celebratory mode. Earnings season thus far has been a cause celebre as banks parade out one beat after another. And why shouldn’t they given the return of trading volumes care of the volatility renaissance and tax cuts that went straight to the bottom line? As an added bonus, banks’ raw materials are brainpower, not metals. They already pay their highly-skilled workers very well, so there’s no need to worry about that same wage inflation that’s biting the industrial sector in the backside torching margins.

As for what’s to come, perhaps we should key off of trucking giant J.B. Hunt. With a hat tip to Peter Boockvar for catching this, read the following earnings excerpt very carefully. “JBT revenue decreased 1% from the same quarter in 2017. Revenue excluding fuel surcharge decreased approximately 3% primarily from a 15% decrease in load count partially offset by an increase in revenue per load. Revenue per load excluding fuel surcharge increased 14% primarily from a 10% increase in rates per loaded mile and a 3% increase in length of haul compared to the same period last year.” Did you catch it? Load count fell 15% over last year but the top line was salvaged thanks to a rate increase.

I’m not sure what you call a decline in activity offset by higher prices, but it does have a name in the dismal science of economics and it isn’t one many like to harken. Is this dreaded fate what the yield curve is so desperately trying to communicate? If that’s the case, the message is falling on deaf ears. Volatility has been tamed anew and stocks are all the rage as if February never happened.

The same cannot be said of our nation’s teachers who are increasingly hot-tempered as the spring budget-writing season gets underway. Massive Medicaid and pension underfunding seem to have taken a toll on school funding and many teachers have had it up to here, compelled to protest their unfortunate circumstances, especially any threats to their pensions. Does anyone at all see a bit of irony in their outrage? For more on this, please enjoy this week’s, Public Pensions & the Trolley Problem: The Impossibly Immoral Choices the Future Holds.

Before bidding you adieu for the week, I would like to reiterate my call to action from last week. Last November, Rich Yamarone passed away suddenly at the age of 55, much, much too young. Rich had become as an institution in and of himself as senior economist at Bloomberg. Everyone he called friend he loved and made laugh, and we were all better for knowing him. My dear friend Josh Frankel has blessed Rich’s memory by spearheading the creation of the Richard A. Yamarone Memorial Scholarship in Economics at Brooklyn College. In the past week, Peter Boockvar, Philippa Dunne, David Rosenberg and Barry Ritholtz have joined me in calling upon their listeners and readers to give as generously as they can to this honorable endeavor. Please join us in contributing via the link below.


NOTE:  Donors should enter “Richard A. Yamarone Memorial Scholarship” in the comments box provided to ensure that their gift will be allocated to the Yamarone Scholarship. 
Hoping you don’t have to duck into a storm shelter, of any kind, and wishing you well,


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DiMartino Booth, Money Strong, Fed Up, NY Fed, MIGRATION OF MEDALLIONS.MOVE

The Migration of the Medallions — Leadership, Leniency and Leaks at the NY Fed

Inflation is up, and the yield curve is flattening? What gives? In bond market nomenclature, much of which is indecipherable by the design of craft fixed income traders, what we are witnessing today is a bull flattening. Long maturity Treasury yields are falling at a faster pace than short rate Treasury yields are decreasing.

The short rates rising reflects the March core CPI, which excludes those two essentials of food and energy, hitting 2.1%, the highest in 13 months. At 2.4%, the headline CPI is also at a 13-month high. It would seem consumer prices are finally beginning to echo what we’ve known on the input side, that is producer prices rising at the fastest pace in nearly six years, not months.

As for the pressure on the long end of the curve, words such as “missiles” and “strike” when combined tend to make markets a bit edgy. The clear winners are investors who have been waiting for such a development to hammer home the validity of their owning oil. Refer back to that headline CPI, however, as relentlessly rising gasoline prices will do little to assuage drivers and policymakers.

Is this Syria business the real deal? The crafty analysts at Political Alpha, one of the Street’s preeminent political intelligence outfits, certainly seem to think so. “The main issue under debate is that last year’s strike didn’t deter Assad from using chemical weapons. The conclusion is that a bigger strike is necessary.” That emphasis is theirs, not mine.

So, the Administration is serious even as the GOP’s leadership ranks continue to disperse. Nervousness is thus justified.

In the other corner of the market ring is the happy crew, those who are elated at Chinese President Xi’s sweet nothings. The risk, as has been the case since Xi took office, is that Xi’s words are closer to being nothing at all.

According to the China Beige Book, trade tensions aren’t going anywhere. “Markets have rallied several times over the past few weeks on the idea that Presidents Trump and Xi can quickly come to a trade deal. The logic: ‘It makes too much sense not to.’ We disagree, possibly over the short term and certainly over the long term. Media and business hysteria over the tariff list aside, going after China is perceived as still popular by the White House and both sides of the congressional aisle.” Again, the emphasis is theirs.

The market’s relative euphoria could just be a simple, technical matter of short covering as those betting on a negative outcome get squeezed by happy headlines.

Of exceedingly more importance is the upcoming earnings season. Traders are betting on companies continuing their streak of under-promising and over-delivering on the bottom line. Banks may be the exception and get things off to a swimming start but be careful from that point on.

As my great friend, Dr. Gates warns, persistence cannot be discounted. To wit, input costs have been rising at a most persistent rate. Headline PPI final demand grew at a 0.3% rate in March – it’s been higher for six of the last eight months, a streak not seen since the eight months ended July 2011. Perhaps more tellingly, the measure favored by the Federal Reserve, that is core PCE, has risen in five of the last six months. The last time we’ve seen such persistence: the six months ended March 2008.

Fed Chair Jay Powell and his recently anointed second in command, John Williams, have their work cut out for them. Come June, Williams will rise to the position of Vice Chair of the FOMC, permanent vote and all, in his capacity as New York Fed President. Williams comes to the position with deep experience on the economics front but precious little as the financial markets go. In a perfect world, the duo will have everything from the economy to financial stability to regulation of the banking system covered.

The hope is that Williams’ work ethic and capacity to learn will offset the formidable challenge his new position presents. For more on this, please enjoy this week’s installment, The Migration of the Medallions: Leadership, Leniency & Leaks at the NY Fed.

Before signing off, I would like to share with you a noble endeavor undertaken by my good friend, Josh Frankel. Last November, Rich Yamarone passed away suddenly at the age of 55, much, much too young. Rich had become an institution in and of himself as senior economist at Bloomberg. Everyone he called friend he loved and made laugh, and we were all better for knowing him. Josh has blessed Rich’s memory by spearheading the creation of the Richard A. Yamarone Memorial Scholarship in Economics at Brooklyn College. Please join me in contributing via the link below.

Richard A. Yamarone Memorial Scholarship in Economics at Brooklyn College

NOTE:  Donors should enter “Richard A. Yamarone Memorial Scholarship” in the comments box provided to ensure that their gift will be allocated to the Yamarone Scholarship. 

Hoping someone has blessed your life as Rich blessed mine, and wishing you well,

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DiMartino Booth, Money Strong

When K.I.S.S. Fails – Private Equity on the Razor’s Edge

Don’t you wish every day was Turnaround Tuesday? That’s the clever term coined by a buddy of mine at Citi who sadly cannot be named and take proper credit. But it is a great term to describe the pattern that’s emerged in this year’s first quarter, a three-month span most market players were relieved to see written into the history books.

As for what’s to come, the scent of spring is decidedly in the air. Car sales hit it out of the park in March thanks in no small part to a cordial calendar which provided 20% more Saturdays than 2017 did. Incentives that would make a Mad Man blush and rising interest rates did their fair share as well.

To commemorate the season’s good tidings, General Motors’ executives have, for the sake of our collective auditory intake, dialed back the volume on the noise by reducing the frequency with which they report sales to a quarterly basis, down from what had been a monthly pace since the 90s. To think how swimmingly that worked out for retailers. How very thoughtful indeed.

At the opposite end of the spectrum, it’s become deathly quiet in Tokyo’s bond trading pits. According to the Wall Street Journal, a brand spanking new 10-year issued March 13th didn’t trade…at all, the seventh such instance in 24 years of record keeping.

A well-kept secret closer to home is that the Federal Reserve wasn’t necessarily keen to taper its QE purchases back in 2014. No, the move was a bit more forced on the doves as market functionality was jeopardized because the Fed was buying such a huge slug of Treasury and MBS issuance.

Could the same hindrances be at work in Japan? Or has Kuroda seen the light and acknowledged that QE is as futile an endeavor as any ever undertaken by a central bank? My money is on the former.

Every month, the University of Michigan queries households on what they’re hearing in the news, good or bad. According to Dr. Gates, my eagle-eyed economist friend, something rather unusual happened in March. Upper-income households perceptions of the news swung 50 points from positive to negative.

How unusual, you ask? It is after all, just bluster and talk, not a full-blown trade war. Right? Let’s just say the biggest spenders in an economy that runs on spending aren’t convinced this will blow over. What’s particularly telling is the other three instances in history where such a huge swing has been recorded. That would be November 1987, which needs no explanation; July 2002, when accounting scandals wracked markets; and August 2011, when a no confidence vote on Uncle Sam jolted investors. File that where you like.

Speaking of friends, I would be remiss to not share the infinite wisdom of my good friend Peter Boockvar. He recently made the observation that we no longer live from one economic or business cycle to the next, but we rather ride one credit cycle after another according to the ebbs and flows of monetary policy. If you can’t appreciate the distinction, consider that in the pre-Greenspan world, the Fed’s hiking and easing campaigns made saving cash more or less appealing. Since 1987, however, the virtue of saving has been annihilated altogether, by design. Kind of gets under your skin.

Along those same lines, has all of this private equity fund raising begun to irritate you? “Pigs get fat, hogs get slaughtered” anyone? For more on what’s driving the fee-fest, please enjoy this week’s installment, When K.I.S.S. Fails: Private Equity on the Razor’s Edge.

Hoping you’re not still circling foggy La Guardia in the sky and wishing you well,


PS. Please enjoy my latest Bloomberg column which highlights where the smart money is these days (Spoiler alert: it’s not in the stock market) in Powell Shows Markets Won’t Be Rattled by Volatility.


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The Bounty Hunter and the Fugitive Collateral — The Flight Risk in the Corporate Bond Market

‘Tis the season for bunnies, baskets and bill auctions. Wait – one of those did not belong. And yet, April will herald Treasury bill auctions that put optimists’ posits to the test. Is the spike in short rates a technical glitch that will right itself or is there an underlying issue?

At least we can all agree that borrowers of the $200-plus trillion in leveraged loans, interest rate swaps and mortgages linked to Libor worldwide sure do hope the technical glitch gets fixed and in a hurry. 2018 may be a young year but Treasury bill supply over the past five weeks has already exceeded the 2017 total by over two times. It should thus come as no surprise that demand for Treasury bills is at the lowest in nearly a decade. The first few trading days of April will bring bill auctions that should tell us a bit more about investors’ moods.

Speaking of the last decade, the yield curve is at its flattest in over ten years. After putting up quite a fight, the flight to safety trade finally kicked in during trading yesterday and carried over into the overnight hours. At 2.75%, the 10-year Treasury yield has broken through a key resistance level, technically speaking (again).

If you were just to look at the data, it might stand to reason that long rates are coming down, both here and abroad. Metals prices are receding, which typically flags a tempering in economic activity. On that other hand, rig count in the United States is at a three-year high implying downside to crude prices. Is it a coincidence that the Dallas Manufacturing index tanked in March? More to the point, what’s with all this worrying about inflation?

Please hold is the best answer I can come up with. Follow those earnings reports because other sorts of nefarious price pressures are eating many companies alive. The question is will Jay Powell take note of what companies report? Well, he did start the Industrials Group back in his Carlyle days.

It won’t take long to alarm Powell given what survey data have been saying about transportation and input costs rising. General Mills — cereal maker — gave a preview in one of the first earnings reports to be released commenting that input costs had risen so far so fast it caused the company to turn in a disappointing profits report.

As more companies follow suit, Powell should be emboldened to push for more tightening on the Fed’s part — raising probability that it will be four and not three rate hikes in 2018. Inflation and slowing growth? How very distasteful.

Investment bankers aren’t waiting for any verdicts to come in. They tried their college best to rack up their annual bonuses in just the first three months of the year. If they can manage to crank out another $5 billion in M&A activity in the last few days of the month, March 2018 will go down as the second highest monthly tally for M&A in history.

On the other, other hand, this cycle might just be gearing up for one last push. The yield curve has managed to not invert for the longest period on record, so we’ve got that going for us. Or is that maybe a bad thing? Remind me please. What happens when rates stay too low for too long?

For more on that (rhetorical) question, please enjoy this week’s foray into the wide (and I mean wide) of “investment grade” credit. You’ll understand the air quotes after you read, The Bounty Hunter and the Fugitive Collateral: The Flight Risk in the Corporate Bond Market


Happy Easter or Spring Break or both if they apply in sync, and as always, wishing you well,




PS.  Have you ever read something so good you had to share it? A few days ago my pal Richard Rosso tweeted out this gem of a quote that fits the times more than any I’ve recently read. Enjoy

Humans are prone to herd behavior – it is warmer and safer in the middle of the herd. We feel the pain of social exclusion in the same parts of the brain where we feel real physical pain. So being a contrarian is a bit like having your arm broken on a regular basis. — James Montier


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DANIELLE DiMartino Booth, Money Strong, Jay Powell, J-Curve

Powell & Goliath – Riding Out the Jay Curve

How goes the business of “watching the paint dry”? As boring as the Fed planned? Maybe the stormy markets and Mother Nature are in cahoots and scheming to keep winter alive and as vicious as she’s ever been. From my snowy perch in New York, I can certainly report that Mother Nature sure as heck hasn’t received the memo that Spring has arrived. And neither have the markets.

Call it the risk parity unwind. Pin it on Bitcoin’s downfall. Blame Facebook and trade tensions. But for my money, it’s all about Quantitative Tightening. Or as Nomura’s George Goncalves rightly identifies, what’s really got the markets on edge, is the triple tightening of rising LIBOR, rate hikes and QT. Tack on the European Central Bank’s intentional taper and the Bank of Japan’s inadvertent taper and it’s anything but watching paint dry.

But then, it was always naïve to assume that the diametric opposite of Quantitative Pleasing would be any fun, and foolish to believe the “watching paint dry” meme. For now, the markets are largely unconvinced that all of this tightening will come to pass, or at least that’s what surveys and stocks’ relatively good behavior convey.

The short rate market remains a might bit more skeptical. The LIBOR-OIS spread is on everyone’s radar just like the bad old days of the Great Financial Crisis. For any of you who need a refresher, just think of it as the difference between one interest rate that incorporates credit risk and the risk-free rate, as in the fed funds rate.

Wide is bad, narrow is good. At over 100 basis points, a full percentage-point-plus, the spread is at the widest since the 2007-2009 bloodbath in credit markets. The financial sector is sniffing out risk in the air. Now, some of this has to do with repatriation and a funding shortage, a technical issue that should resolve itself.

But as Citi’s Matt King points out in a short report you should try to get your hands on, the relative calm will soon be disturbed. As King explains, as soon as the Treasury stops paying out tax refunds, continued T-bill issuance will lead to an increase in the Treasury General Account at the Federal Reserve. This will in turn deplete bank reserves by the same amount. And that will reduce the available capital to conduct currency swaps, a decidedly bad thing.

Speaking of the Fed, today is a very important day for one Jerome “Jay” Powell. He will take to the podium at his first post- Federal Open Market Committee press conference. Buoyant stock markets are said to reflect rumors that Powell will wax dovish.

One thing is for sure. Much to the disappointment of those who want to exact revenge on the speculators and a special class of degenerates they refer to simply as “banksters,” Powell will not be pushing through any half-point rate hikes. He may be hawkish, but he isn’t reckless. That is not to say Powell is a pushover. As we heard him say and repeat in his recent Congressional testimonies, it is not the Fed’s duty to put a floor under stock prices.

What Powell should do is announce that press conferences will henceforth follow every FOMC meeting. This simple and elegant move would send shudders through the market but it would also give Powell the flexibility afforded by having every FOMC meeting be “live.” Besides, it’s time for the Fed to grow up. Hiding behind four meetings a year has long since outlived any utility.

For more on the challenges awaiting Powell, please enjoy this week’s installment, Powell and Goliath: Riding Out the Jay Curve


Hoping you’re enjoying Spring weather somewhere and wishing you well.





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Divine Introspection — Crafting the Clearest Crystal Ball

Does anyone feel the need to take a vacation? 2018 will go down in history as one of the most volatile in stock market history and we’re not even through the first quarter. Dramamine could easily replace the No Doze traders needed to keep their eyes open last year. Is this a case of being wary of what you wish for?

At the core of the unrest are the dueling forces of central banks’ various forms of tightening – rate hikes, tapers of intended (ECB) and unintended (Bank of Japan) varieties and, of course, quantitative tightening – and a near anarchy state in an Administration that seems hell-bent on starting a trade war with China.

Meanwhile, back at Uncle Sam’s ranch, the country’s borrowing costs are on the rise as the deficit hits the highest level since 2012. As Peter Boockvar observed, February’s interest expense of $23.3 billion was up 10% on year-ago levels. Interest expense now sucks up 6.3% of spending vs. 5.8% in the prior year.

Even as interest rates and expenses rise for all borrowers, signs are multiplying that the economy is slowing. Retail sales appear intent on maintaining their disappointing streak. To put the most recent figures into perspective, nominal core sales, which net out autos, gasoline and building materials, totaled $268.8 billion in November and $268.2 in February. In other words, they’ve gone nowhere.

As a follow-up to my recent analysis of the car industry, auto sales have fallen for four months running. The continuing clampdown in credit availability should send this sector back into recession, where it last was in September before Mother Nature interceded to give sales a boost.

The Atlanta Fed tracks the data as close as any economist in endeavoring to maintain a real-time GDP forecast. As recently as February, it appeared that growth in the first quarter would clock in at an amazing 5% pace. Yes, the February to which Atlanta refers is one in the same with last month. In the ‘how quickly things can change’ department, after factoring in today’s retail sales report, Q1 GDP looks to come in at a mere 1.9% rate, smack dab in the middle of the middling range it’s been in for the past decade.

What could turn the tide? We’re told that tax refund mailings have been delayed and that the fruits of the tax cuts will be bounteous in future consumption figures. Wage gains, which truly are building despite the consensus’ incorrect take on last Friday’s jobs report (the last time it took so little time to find a job was May 2009), should also manifest in increased spending. The only thing to say to this optimism is, “We’ll see.”

As for upside surprises, to study the markets implies that the outcome of the Italian elections was benign. The first majority vote for non-establishment parties in modern times suggests the situation is fluid, to be polite. The yield on 10-year Italian sovereigns is 2%. Ergo, all must be well in the land of my ancestors. Right?

Truth be told, I’ve painted a picture of confusion on purpose. The murky outlook coupled with nausea-inducing market volatility make economic fortune telling the most difficult of tasks.

The best I can offer is that we should be looking pretty good, as in fit. Take a drive and you can’t help but bump into a fitness, spin, barre, yoga or Pilates studio. Whatever happened to going to the gym? My point is, leading indicators come in many forms. But what do they actually say about what’s to come?

Finding reliable guideposts, true leading indicators, at what appear to be economic inflection points separates the men from the boys, or women from the girls, if we must be PC. This week I’ve taken up that very challenge. I invite you to enjoy this week’s installment, DIVINE INTROSPECTION — Crafting the Clearest Crystal Ball.

Hoping you’re spinning your way to your cardio best and wishing you well.





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Danielle DiMartino Booth, @dimartinobooth, economy, housing prices, REAL ESTATE ROULETTE.sm

REAL ESTATE ROULETTE — Does the House Always Win?

So much for the sunny, funny, isle of Manhattan. Travel snafus related to the lovely ‘thundersnow’ unleashing her fury on New York scuttled my writing schedule, if you’ll pardon the late arrival in your inbox.

The good news is this week’s newsletter is of the evergreen variety, as in you can read it at your leisure, though it might not prove to be all that relaxing.

Before triggering the launch sequence to the newsletter, a word on the markets. Riding the daily ups and downs in the stock market is akin to landing in full-blown thundersnow at La Guardia (where do the meteorologists come up with these colorful terms?)

It’s as if we weren’t reading about the record calm that had lulled markets into a gravity-defying comatose state just months ago. In the space of one calendar quarter, we now find ourselves reading headlines declaring 2018 to be one of the most volatile on record. And it’s just now March!

Investors for their part are falling all over themselves, jockeying for the top spot in the guessing game of How Will Jerome Powell React? Will it be QE4? How will that look? Treasuries and more mortgages or will he pull a Draghi and start buying corporate bonds?

Call it pig-headedness, call it what you will. I’m still of the mind that Jay Powell is of his own mind. “Reactionary” just doesn’t fit the mold. Besides, the most convenient scenarios require Quantitative Tightening to stop in its tracks, which is a huge assumption considering he was one of the primary advocates to have a set game plan to execute QT…six years ago.

More to the point, as the ADP report reminded us this morning, job creation has averaged 210,000 for 12 months running. Leave behind the hard data/soft data debate for a moment. Jobs matter more than anything else, especially for an economy dependent on consumption to drive the train. And Jay Powell knows it.

Lael Brainard herself, the last of the old guard of doves on the Board, agreed in a speech that rate hikes should remain on track. Given the tough talk, even from the doves, investors would be best served preparing for four or six rate hikes in 2018.

Come again? Four rate hikes are considered to be the worst-case scenario. Two is the kinder, gentler hoped-for middle ground. But when you consider that roughly every $200 billion in QT equates to a quarter-point rate hike, and that the Fed is poised to execute $420 billion in QT this year, what we really should be talking about is whether we will get the equivalent of four or six hikes worth of tightening.

As for the stock market giving Powell anxiety attacks day in and day out, don’t count on his getting a case of the jitters. On both of the days he testified to Congress, Powell took the opportunity of baiting politicians to assure investors it wasn’t the Fed’s job to give credence to the stock market. Can we please get a “Go Jay!”

While we’re in the cheering mood, perhaps we should wish the current stock market rally a Happy Ninth Birthday! That’s right, it’s that time of the year again when we look back to March 9, 2009, when the S&P 500 bottomed at 666 in intraday trading.

Speaking of anniversaries, but of the happier sort…I had hoped to be in New York today to wish my friend Arthur Cashin a happy birthday in person. In that Mother Nature had another thing to say about those plans, I hope you will join me in wishing the best market historian ever to grace us with his presence the same, a very happy birthday.

With that, I welcome you to enjoy this week’s installment, REAL ESTATE ROULETTE: Does the House Always Win?

To any stranded travelers and all the birthday boys and girls, wishing you well,


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ICYMI – please enjoy the best in class – 2017’s Money Strong Top 10.

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Of Latvian Laundry & Italian Idolatry — And Other European Tales from the Crypt

Greetings from the sunny, and oft times funny, isle of Manhattan. Spring is springing, infusing the air with the promise only the changing of the seasons can induce. What a delight to bear witness to the beauty only unique New York can offer — fumes, sirens, blaring horns and all.

For a different sort of nice change, the political scene here is not the world’s focal point. The battle lines being drawn are between Great Britain and the European Union, where hard tacks Brexit negotiations are heating up.

There are but three weeks remaining for the EU and Britain to agree upon the terms of a Brexit transition, scheduled to take place in 2019. But it’s becoming increasingly likely Prime Minister Teresa May and her conservative government won’t even push off the starting block to getting a deal done.

The main sticking point to the EU’s trade proposal involves the status of Northern Ireland in a post-Brexit world. The establishment of a ‘hard border’ with the Republic of Ireland indicates that customs controls and immigration checks would be established. From the economic and political perspectives of parties on both sides of the border, free movement remains tremendously beneficial.

The real issue comes down to sovereignty. Critically, Northern Island would be subject to EU institutions and judges. More broadly, the trade deal is expected to propose the European Court of Justice oversees the final deal which facilitates Britain’s exit from the EU. To be clear, a European authority would have authority to enforce EU law on British sovereign territory.

Exacerbating the tenuous dynamic, Teresa May faces dissension from various factions of the House of Commons and even within her own conservative government. The very un-British drama of it all!

For all its challenges, Britain does have one distinct advantage over all of its developed market peers, that of time, at least in a fiscal sense. The graph below popped onto my Twitter feed yesterday care of Bloomberg’s Lisa Abramowitz. The Deutsche Bank chart tells a simple enough story. The United States wasted a great opportunity to extend the maturity of its sovereign debt while Britain seized upon the lowest borrowing costs in 5,000 years as no other.


In the event you’re chummy with anyone on the Senate Banking Committee, could you please call in a favor and request that they ask Jay Powell what possible explanation there is for Uncle Sam being such a senseless borrower?

With any luck, we would get more of what we’ve now heard twice – forthright answers, just as was previewed in my most recent Bloomberg column, Powell Brings Plain-Spokenness to the Fed.

In the event you missed Powell’s Congressional debut Tuesday, here are my two favorite answers. When asked about the ideal unemployment rate, Powell didn’t begin to get boxed into any sort of target nonsense that plagued his predecessors. He simply said: “If I had to make an estimate I’d say it’s somewhere in the low 4s, but what that really means is it could be 5 and it could be 3.5.”

And then there was my absolute favorite, which needs no introduction: “We don’t manage the stock market,” but “it enters into our thinking. I think the general thing is that the stock market is not the economy.”

Powell did not scream fire in a crowded theater as so many of his premature detractors had hoped. That would have made him the daft one.

I would add one note of caution to Powell’s prediction that the U.S. economy will remain on solid footing for the next two years, and that is the U.S. economy does not function inside a vacuum. As was the case when our financial crisis bled into other economies, it is equally plausible that events beyond our country’s reach can and will bleed into our economy.

As to the closest risk in range, it is not tempestuous Brexit negotiations. As nonplussed as the world is, this Sunday’s Italian elections do have the power to disturb the relative peace that’s prevailed since our own election day. For more on that and other challenges facing our European counterparts, please enjoy this week’s installment, Of Latvian Laundry & Italian Idolatry and Other European Tales from the Crypt.


To our friends in Britain and Italy, and as always, wishing you well,





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Danielle DiMartino Booth, CLEARDANGER.sm


Will Autos Crash the U.S. Economy?

After ten years, is the time finally upon us? We will soon enough know. Today marks the first Minutes release that carries the promise of cleanliness. As I’ve written to on multiple occasions, in disapproval mind you, in 2008, Janet Yellen suggested that the FOMC Meeting Minutes be manipulated to massage the intended message the FOMC should have conveyed.

If investors had misread the statement, or if the world had changed in the three weeks since the statement was released, well then just change the verbiage of the Minutes to reflect the Fed’s new and improved outlook. How convenient.

But Yellen will not have been in the house when today’s Minutes were set to be released. That means they might, just might, reflect what really was said around that mammoth table in the Eccles Building.

If we do read of a raging inflation debate, you can bet your bottom dollar we’re getting clean goods. If the verbiage is nice and soft, well then, that will reflect poorly on Jerome Powell’s leadership abilities. It will be an admission that the Fed should have soothed frayed nerves the intraday minute the Dow was down 1,600, not even waiting for the close.

I do so hope it’s the former of the two, that Powell takes this second step to restoring decency, decorum and dignity to the institution. The first step towards becoming a truly apolitical and independent institution will thus stand – the Powell being mum to stock market gyrations part.

If stocks are rattled now, just wait until the storm building in the auto sector comes onshore. Several weeks back, I was taken to task for even suggestion that such a fate awaited the U.S. economy. What do they say about making lemonade with lemons?

This week I’ve taken the opportunity of being called out to make some calls to the best and the brightest covering the auto sector. The analysis and data they provided from multiple sources provided plenty of back-up to support my initial assessment. If anything, I fear forecasts calling for new car sales to decline to a 16.7-million annual rate are overly optimistic.

On a personal note, as a mother of four school-aged children, I am truly distressed to witness the acceleration of school violence. The incident made me recall yet another beautiful Peggy Noonan column. As she wrote:

“It’s hard to know another person’s motives,” a friend once said. “But then it’s almost impossible to know your own.” We are often mysteries to ourselves. The area between your true self and the mystery—that’s where trouble happens.

That passage reminds me of a great book once recommended to me to read. I can only pray our nation’s leaders have the wisdom, upon reflecting on the sad state of violence in our schools, to stand up for our nation’s children. It’s well past time to conduct background checks that prevent weapons that have one place and one place only – that is, the battlefield – from falling into the hands of those inclined to make tragic trouble that sacrifices our babies and those who nobly endeavor to teach them.

With that, I do hope you enjoy this week’s installment, Clear & Present Danger: Will Autos Crash the U.S. Economy?

To all of our nation’s students, safekeeping, and as always, wishing you well,



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The Dark Side of the Boon

Whither stagflation? Say it isn’t so! Like it or not, the unrounded core inflation for January came in closer to a gain of 0.4%. In other words, look for the year-over-year rate’s next stop to be 1.9%. What could offset this march upwards? New car prices fell month-over-month and year-over-year. This trend should accelerate as millions of SUVs come off lease this year.

The question is, does the threat of rising inflation become a self-fulfilling prophesy?

We’ll know with tomorrow’s release of the producer price index. That’s where the real action is that’s driving inflation — the front end of the pipeline. For more insights into what is driving input prices, link on to my fresh off the presses Blomberg column: Inflation’s Real Threat to the Economy.

As for investors, it’s plain they’re anything close to game for a hawkish turn at the Fed. Call it the global grab for easy money. My good friend, George Goncalves, is Nomura’s Head of U.S. Rates Strategy. He’s just returned from a tour through Europe and was kind enough to share his insights into the thinking of investors across the pond. In the interest of gauging clients’ expectations for growth and inflation and how the Federal Reserve’s reaction to changes in the economy and financial markets fit into the equation, he received the following four queries:

“What would it take for the Fed to skip March, when does it need to signal?”
And if it hikes in March “why would it raise the dots at this meeting when it can just wait and see how financial markets and the economy react and raise forecasts in June instead, especially since it’s Chair Powell’s first presser?”
“How much of an FCI (financial conditions index) hit is needed for the Fed to abort normalization?”
“Will Powell go slowly to avoid any backlash from the Trump Administration?”
Granted, these questions are to be expected after a downdraft in equities after months (years) of a non-stop rally. That said, the underlying tone suggests that many market participants are still banking on the Fed to act as a back stop should conditions worsen.

The weight of the world rests on Jay Powell’s shoulders. Let’s just hope he is strong in his convictions and that stock market hissy fits don’t equate to threats to financial stability in his mind. So far, that seems to be the case. The bounce back in the markets is no doubt buying Powell the time he needs to prepare for February 28th, when he is due to face Congress for the first time, and March 21st, when he steps into the true lion’s den, the press conference that follows the next expected rate hike.

As long as the wealth effect for the wealthy stands pat, it would seem, grace will be given. On that note, I’m compelled to share a breath of fresh air on the so-called ‘wealth effect,’ or as one clever Twitter follower rightly identified it, the ‘wealth defect.’ Many of you are familiar with the succinct work of Stephen ‘Sarge’ Guilfoyle, a hard-hitting stock jock and markets commentator who’s seen a thing or two in his career as a U.S. and markets veteran. He woke this morning feeling “warm and fuzzy.” And why wouldn’t he on this Valentine’s Day?

On the other hand, he had this to say on unicorns and other figments of our collective imagination: “Bernanke’s wealth effect…a reality in the short term. It is nothing more than a perversion of longer-term trends set to exacerbate potential declines in U.S. standards of living. A House of Cards.” Indeed.

On a separate note, I was deeply disturbed to learn of a recent Guardian story depicting a recent acquaintance of mine, Artemis Capital Management’s Christopher Cole, in a scathing, false light. As a member of the Fourth Estate, I was horrified at the insult to the field of journalism deceptively depicted as ‘reporting’ and appalled at the unsubstantiated personal attack the writer unleashed.

As a markets veteran myself, I was equally aghast at the light in which hedging itself was depicted. I will touch on the quaint stance pensions have taken with regard to hedge funds in the weeks to come. For the moment, and in defense of all true hedge funds, let me say that the sanctioning of the abandonment of hedging in today’s world should be grounds for termination. After all, when executed properly, hedging is a portfolio’s only way of protecting its precious cargo, in the case of pension funds, retirees’ nest eggs.

I’ll share with you the best of the blatantly, wrongly accused Cole’s letter to the Guardian, which I’ve linked and encourage you to read in full:

“If we do our jobs right during market turmoil and heightened volatility, teachers and doctors won’t be laid off, life savings and retirement plans are not critically harmed, and investors have a solid defensive position in their portfolio.”

Damn straight.

It’s been altogether too convenient to blame the machines for the past few weeks’ market disturbance. Don’t fool yourself. It’s the people behind the machines that foment market disruption, not the machines themselves. You’d best be hedged for what’s to come.

In the meantime, be equally safe assured that the wealthiest in our midst are preparing for what they see with their own eyes: a decided turn in the market and economic cycles. If turn-of-the-century, post Greenspan/Bernanke/Yellen-put history is any guide, rumblings in the market manifest in form of pain for the real economy. For more on how the tail of the markets now wag the dog of the economy, please enjoy this week’s installment: The Dark Side of the Boon.

To the wrongly accused my very best, and especially today, which marks the one-year anniversary of Fed Up’s release, wishing you well,





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