{"id":151161,"date":"2022-12-21T19:59:06","date_gmt":"2022-12-21T23:59:06","guid":{"rendered":"http:\/\/stateofthenation.co\/?p=151161"},"modified":"2022-12-21T19:59:06","modified_gmt":"2022-12-21T23:59:06","slug":"war-of-the-titans-the-fed-vs-ecb","status":"publish","type":"post","link":"https:\/\/stateofthenation.co\/?p=151161","title":{"rendered":"

WAR OF THE TITANS: The Fed vs. ECB<\/b><\/h1>"},"content":{"rendered":"

Rate Hikes, Recessions and the Death
\nof Spiritual Boomerism<\/strong><\/h1>\n

\"\"<\/p>\n

Tom Luongo
\nGold Goats \u2018n Guns<\/p>\n

I hate to gloat but, screw it. I\u2019m gloating. With every FOMC meeting this year, Jerome Powell has become more and more hawkish, but the denial of this still dominates the headlines. He raised the Fed Funds Rate to 4.5% last week, a level unthinkable to nearly everyone, including me, this time last year.<\/p>\n

I told you all over\u00a0a year ago Powell and the Fed<\/a>\u00a0were going to war with\u00a0Davos<\/em>\u00a0and the ECB over Climate Change and their push for war with Russia. No one believed me then, and rightfully so. The idea was daft given the Fed\u2019s history, the US\u2019s books and the reality of a \u201cBiden\u201d presidency seemingly hellbent on spending the US into oblivion.<\/p>\n

Hell, I barely believed me.<\/p>\n

What I did believe was the Fed would be more aggressive than the majority in even the alternative finance space did, what I like to think of as the\u00a0Zerohedge Set<\/em>, because I didn\u2019t think Powell was just another garden-variety globalist like his predecessors, Janet Yellen and Ben Bernanke.<\/p>\n

In this business, \u201cpersonnel is policy\u201d is more important than our opinions on the numbers or even the state of the game board. Powell isn\u2019t cut from the same egghead, ivory tower cloth of academia like Yellen and Bernanke.<\/p>\n

He\u2019s a private equity guy with a real background in deal-making and assessing risk when his money or his client\u2019s is on the line.<\/p>\n

So, expecting him to run the Fed the way Yellen and Bernanke did is a simply a bad assumption.<\/p>\n

Powell\u2019s statement on Wednesday was no less hawkish at 4.5% than his statement at Jackson Hole in August before he raised rates by 75 basis points to 3.25% in September. And yet, in the days leading up to Wednesday\u2019s announcement and even afterwards the talk was still all about how he can\u2019t go much higher; this is the last hike before he stops.<\/p>\n

\"\"<\/figure>\n

In article after article that\u2019s all we hear. Stop raising rates, it\u2019s your fault you\u2019re behind the curve, Powell. Stop trying to make up for it. This guy,\u00a0Peter Tchir actually thinks a recession is avoidable?\u00a0<\/a>Maybe in nominal terms that\u2019s possible. To the normie crowd goosing nominal GDP constantly to avoid \u2018number go down\u2019 at the expense of literally everything that makes private capital formation possible may seem like a good idea.<\/p>\n

\n
\"\"<\/figure>\n<\/div>\n

Then again, you may be a Boomer.<\/p>\n

But in real terms, terms that matter like directing capital into sustainable investments rather than throwing money at any silly \u2018shovel-ready\u2019 project Obama\u2019s minions can cook up in a strategy meeting to sell to the Muppets, the idea of avoiding a recession is ludicrous on the face of it.<\/p>\n

If anything, in real terms for fourteen years we haven\u2019t been in anything other than a drawn-out struggle session forcing us to admit under duress that yes, in fact, Virginia, there is a Santa Claus who lives in the Marriner-Eccles building and he can make two plus two equal five.<\/p>\n

It\u2019s all been a massive leveraged loan bubble built on trillions in the most egregious spending of future seed corn in the history of the planet. No wonder Climate Change and \u2018sustainable growth\u2019 are such an easy sell to the Millennials, they\u2019ve never really known anything other than the debt casino.<\/p>\n

To bitch now about Powell being behind the inflation curve is just churlish back seat driving.<\/p>\n

As I pointed out time and again, Powell\u2019s reappointment was the subject of intense political struggle on Capitol Hill. He was only reconfirmed 6 months after he should have been and was under direct fire before that.<\/p>\n

The policy differences between \u201cBiden\u201d and Powell placed \u201cPrivate Equity Jay\u201d behind the curve not because he was too chickenshit to start sooner but because \u201cBiden\u201d needed an excuse to not re-nominate him as FOMC chair. Raising rates in anticipation of incoming inflation while wrangling over \u201cBuild Back Better\u201d and its $6+ trillion in spending would have given us Lael Brainard, MMT and UBI to eternity.<\/p>\n

And the US dollar bears would have rejoiced in having been right all along while\u00a0Davos<\/em>\u00a0grinned like the proverbial Cheshire Cat eating all the canaries.<\/p>\n

This willful blindness to the politics of monetary policy is bad enough. But the whining about taking the punch bowl away is just selfishness masquerading as analysis. Like it or not, Powell had no choice but to monetize COVID-19 spending. That\u2019s on Congress and Trump.<\/p>\n

I\u2019m happy to lay blame at the Fed\u2019s feet, but only when that blame is appropriate. Congress doesn\u2019t get to blackmail the Fed AND blame them for the country\u2019s ills at the same time.<\/p>\n

And this is why I\u2019m gloating today. Because I\u2019m sick to death of this \u201cSpiritual Boomerism<\/a><\/em>\u201d rampant within the financial commentary space that believes\u00a0recession<\/em>\u00a0is the dirtiest word in the English language and avoiding them is the Fed\u2019s real job, even if it costs us our souls.<\/p>\n

As I wrote last year:<\/p>\n

\u2026 because we all want to believe we\u2019re smarter than average bear and don\u2019t want to face tomorrow without our favorite things we go along with the comfortable lie\u00a0[we have mastered time risk].<\/strong><\/p>\n

In other words, we believe risk is someone else\u2019s problem. And that we owe the debts to ourselves. And it\u2019s okay to foist risk off on those hapless suckers lest\u00a0we be inconvenienced by the barest minimum of privation.<\/strong><\/em><\/p>\n

Let\u2019s call that, in the words of a friend of mine, Spiritual Boomerism.<\/strong><\/p><\/blockquote>\n

That\u00a0Spiritual Boomerism<\/em>\u00a0is fed every day by\u00a0Davos<\/em>\u00a0and their flunkies in FinTwit, like Jim Cramer, Paul Krugman and every other dickhead out there talking their book.\u00a0Davos<\/em>\u00a0needs to stop Powell and the NY Banks from upsetting their plans to turn the future into a Phildickian nightmare of total surveillance, 100% tax compliance and the ultimate veto over your economic and, if they get their way, reproductive choices.<\/p>\n

If you think things suck now, just wait for the Great Ennui that comes with the\u00a0Great Reset.<\/em><\/p>\n

It\u2019s a pernicious narrative woven into the fabric of our daily lives.\u00a0Davos\u00a0<\/em>helped erect this central bank dominated world which undermined our cultural and spiritual strength, addicting us to this idea of consumption without purpose and risk without consequence.<\/p>\n

\n
\"\"<\/figure>\n<\/div>\n

We had the chance in 2008 to flush this system and chose not to. We papered everything over and created the most perverse version of an economy in 2000 years.<\/p>\n

We got to process our grief at losing everything during that crisis by going to negative real yields for so long we began to believe that we conquered time itself.<\/p>\n

No idea was beyond the pale when the cost of money had no meaning.<\/p>\n

And it led us to today where it is the right of 6 year-olds to mutilate themselves without parental consent, all in the name of fighting a goddamned patriarchy we could only wish was still somewhat functional.<\/p>\n

It ground forward for another fourteen years accelerating the insanity to the point of identity crisis at a cultural level. There is no idea more indicative of\u00a0Spiritual Boomerism<\/em>\u00a0than that of inflation being inherently better than deflation.<\/p>\n

And that\u2019s what drives all of this angst over Powell\u2019s refusal to \u2018pivot\u2019 off raising rates. Gods forbid the assholes in power have to give up their third home or the second Bentley. At the rate the two are deflating in Powell\u2019s New America, I\u2019m not sure which one will be worth more in a year.<\/p>\n

\n
\"\"<\/figure>\n<\/div>\n

But the worst part about all of this\u00a0Boomerist<\/em>\u00a0denial is it allowed the ECB\u2019s Christine Lagarde to run the ultimate bluff for more than a year about its truly insane monetary policy, ignoring inflation that we could all see but didn\u2019t want to believe was real.<\/p>\n

Because the alternative was realizing that King Dollar had another round left in the tank before getting knocked out by the Global South\u2019s plans to de-dollarize completely.<\/p>\n

Since Powell began raising rates in March, EU energy policy dramatically raised the cost of domestic energy. That inflation is a feature, not a bug. And it can\u2019t be fixed. With each sanctions package against Russia (now 9 in total\u2026) Europe\u2019s energy story became more ludicrous and yet the markets kept pricing risk like the US was in worse shape.<\/p>\n

Look, I get that Pelosi is a scary old broad, but c\u2019mon!<\/p>\n

Lagarde kept putting off the day of reckoning. In July she offset the fall of Italy\u2019s\u00a0Davos<\/em>\u00a0government with announcing the Transmission Protection Instrument (TPI), which is basically Operation Twist for internal Euro-zone debt. At the same meeting she raised rates for the first time.<\/p>\n

She should have called it the Toilet Paper Initiative, because that\u2019s what it will do to the euro.<\/p>\n

So, like Kuroda at the Bank of Japan, she committed to QE forever and tightening\u2026. simultaneously!<\/p>\n

And the markets believed her while continuing to disbelieve Powell.<\/p>\n

To say it was bizarre is the height of understatement.<\/p>\n

Well, that finally came to an end last week. And this is really why I\u2019m gloating today.<\/p>\n

Lagarde finally had to admit that inflation was no longer\u00a0transitory<\/em>\u00a0and that the ECB\u2019s long-run projections of inflation to end this year were nowhere near reality.<\/p>\n

While everyone was hoping Powell would only go 25 basis points because US CPI came in 0.2% lower than expectations at 7.1%, no one looked at Germany\u2019s CPI coming in above expectations at 10% just four hours earlier.<\/p>\n

Until Lagarde finally admitted she\u2019d lost the inflation battle she wasn\u2019t even fighting, US\/German credit spreads still traded like she was competent and Powell wasn\u2019t.<\/p>\n

\"\"<\/figure>\n

At this point it\u2019s offensive to think that this neck scarf obsessed lawyer has a sharper economic mind than Jerome Powell.<\/p>\n

It\u2019s equally offensive to see German debt trading at a 130-140 basis point premium to US debt, given relative inflation rates, energy policies and strength of currencies. Honestly, euro-zone debt is trading like\u00a0the EU has a trade surplus<\/a>\u00a0and a vibrant middle class. These are both lies.<\/p>\n

\n
\"\"<\/figure>\n<\/div>\n

But such is the power of propaganda. Illusions die painful deaths because of the management of perspective that goes on every day.<\/p>\n

Lagarde bought herself a few months reprieve with the TPI, but eventually had to admit the truth. Today she still has to choose between defending the euro or defending credit spreads. She can\u2019t do both.<\/p>\n

Why does anyone believe she can do either?<\/p>\n

Speaking of truth, if there was any in these markets, the US\/German 10-year yield spread would be negative rather than positive. On what planet does anyone think, on the eve of wider war in Ukraine, that Germany is a more stable political force than the US?<\/p>\n

Because German Greens are such a powerful international force for growth?<\/p>\n

I thought bond traders were serious people. Guess not.<\/p>\n

\n
\"\"<\/figure>\n<\/div>\n

After months of my fighting the narrative that the EU has no agency in the policy surrounding Russia and Ukraine, I have to ask the following question: If you truly believe the EU is a vassal state to the US, why aren\u2019t you putting your money where your mouth is?<\/p>\n

Why aren\u2019t you buying US debt faster than German debt?<\/p>\n

What kept you from making the move?<\/p>\n

Or is it that you really understand\u00a0Davos<\/em>\u00a0is mostly in control over US fiscal policy (true) and think they\u2019ll be successful in sabotaging the Fed\u2019s attempts at independence through aggressive monetary tightening (up for grabs)?<\/p>\n

That\u2019s honestly the only conclusion I\u2019ve got for why it\u2019s taken this long for everyone to figure out that Lagarde is full of shit, has no cards to play, and is now on the precipice of the biggest bankruptcy in the history of modern banking.<\/p>\n

If you think I\u2019ll cry one crocodile tear over the death of the ECB\u2019s credibility in the coming weeks, I have bridge-front property to sell you in Brooklyn.<\/p>\n

Powell didn\u2019t embark on this path to salvage his personal credibility. He\u2019s worth nine figures, FFS. This is something fundamentally different that that.<\/p>\n

My best guess is that it is exactly what I\u2019ve said it was from the beginning, a fight for the future of capital formation. Either we return somewhat to it being handled by private capital markets or we reach the end state of the past 80 years and the apotheosis of central banking.<\/p>\n

Looking ahead, I\u2019d watch the US 2\/10 spread to see if this month\u2019s tightening takes hold for real. We\u2019re at -67 bps. A move above -65 this week would be technically interesting.<\/p>\n

It might actually be the sign that\u00a0Spiritual Boomerism\u00a0<\/em>is on the wane as more people accept what\u2019s happening.<\/p>\n

Powell\u2019s not coming to our rescue. The Fed isn\u2019t our friend. The Fed Put was only a slightly dumber idea than Climate Change being caused by anthropogenic CO2.<\/p>\n

The quicker these bad ideas die the quicker we can face our future, bleak though it may be, honestly. And maybe we can put away the childishness of thinking a world without risk is in anyone\u2019s best interests.<\/p>\n

___
\nhttps:\/\/tomluongo.me\/2022\/12\/20\/rate-hikes-recessions-and-the-death-of-spiritual-boomerism\/<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Rate Hikes, Recessions and the Death of Spiritual Boomerism<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-151161","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/stateofthenation.co\/index.php?rest_route=\/wp\/v2\/posts\/151161","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/stateofthenation.co\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/stateofthenation.co\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/stateofthenation.co\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/stateofthenation.co\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=151161"}],"version-history":[{"count":0,"href":"https:\/\/stateofthenation.co\/index.php?rest_route=\/wp\/v2\/posts\/151161\/revisions"}],"wp:attachment":[{"href":"https:\/\/stateofthenation.co\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=151161"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/stateofthenation.co\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=151161"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/stateofthenation.co\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=151161"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}