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Tom Luongo<\/p>\n
The ECB has a credibility problem. \u00a0It didn\u2019t last year. \u00a0Last year it was the Fed with the credibility problem. \u00a0Today, it\u2019s Christine Lagarde not Jerome Powell that needs to justify her policy.<\/p>\n
Powell needed nearly a year after he began raising rates to get a significant portion of the market to believe he was serious about raising rates. Today, they don\u2019t believe him if he making the odd dovish coo.<\/p>\n
I don\u2019t blame the market for its previous skepticism, it was well earned. But as I\u2019ve pointed out many times, Powell\u2019s incentives line up with his intentions and that has translated directly into Fed policy.<\/p>\n
Lagarde has done the same thing, except she forgot that whole \u2018incentives\u2019 part. She has clearly tried to force her intentions onto the market to effect her masters\u2019 policy.<\/p>\n
So, she tried to out wait Powell, hoping that domestic US politics would force his hand into the \u2018pivot\u2019 that hasn\u2019t come and won\u2019t until something breaks.<\/p>\n
That something in my mind is still the ECB. And the race is on as to whether deteriorating credit and economic conditions in the US will force Powell\u2019s hand rather than Lagarde\u2019s. The keys are oil prices and the Bank of Japan.<\/p>\n
At last year\u2019s July meeting Powell raised rates another 75 basis points and Lagarde responded by announcing the Transmission Protection Instrument (TPI) or Toilet Paper Initiative, as I like to call it.<\/p>\n
The TPI was put in place to manage German\/Italian credit spreads, because last summer they were blowing out very wide and threatening to take down the entire Euro-zone bond market. Powell\u2019s studious application of \u201cRate Hikes of Unusual Size\u201d as Danielle Dimartino Booth put it to me\u00a0in the podcast we did back in February<\/a>, was the cause.<\/p>\n The TPI announcement was paired with statements about the end of the ECB\u2019s current QE programs. But the TPI is just QE in another form, especially if coupled with the ECB and European-adjacent jurisdictions are deploying reserves to manage the US yield curve.<\/p>\n But the TPI alone clearly isn\u2019t enough. Eventually, shuffling underwater bonds from one pocket to another to massage credit spreads runs into the basic problem that Powell hasn\u2019t stopped raising rates.<\/p>\n Eventually,\u00a0as I pointed out in a recent article<\/a>, policy limits are reached when rates themselves are the problem, not spreads. As a reminder, here\u2019s the German 10-year weekly chart and Lagarde\u2019s defense of 2.5%<\/p>\n Oh, and inflation was \u201cstickier\u201d than Lagarde was fronting this time last year. She was still on the \u201ctransitory\u201d talking point. For some reason, the markets believed her. Or, more specifically,\u00a0wanted to believe her<\/em>.<\/p>\n The euro-zone bond market is a cancer patient in Stage IV. Each time there is a major event, the rot within it metastasizes again and a new alphabet program has to be invented \u2014 OMT, TARGET2, ESPP, TPI, ZOMG.<\/p>\n At this point, there is no internal solution, save blowing up the entire fiction of individual central banks within the EU. Lagarde needs help from the outside to keep this patient alive.<\/p>\n She gets that regularly from both the Biden administration in general as well as Treasury Secretary Janet Yellen specifically.<\/p>\n In this month\u2019s Gold Goats \u2018n Guns newsletter\u00a0<\/a>I laid out why I thought Yellen went to China to beg them to stop selling\/start buying US Treasuries to keep a lid of global debt yields and the geopolitical implications for thiis. This morning\u00a0Zerohedge reports that Yellen<\/a>\u00a0has already issued more than $500 billion in new debt and will sell more than $1 trillion in Q3 and another $722 billion in Q4. From the\u00a0Treasury Marketable Borrowing Estimates report<\/a>:<\/p>\n With this much borrowing I expect Yellen can and will support Lagarde by structuring Treasury sales to over-supply high-yielding short term debt and under-supply long-term debt. It\u2019s a subtle form of\u00a0yield curve control<\/em>\u00a0designed to keep the 2\/10 inversion high and the bid under the long-end of the curve strong.<\/p>\n Clearly, if you can keep long US yields well bid you help the ECB hold the line on German debt. But will it be enough?<\/p>\n The problem for these two\u00a0 Powell raise by 25 basis points as expected. \u00a0So too did the ECB, also expected. \u00a0Powell\u2019s post-statement comments were also abundantly clear, he doesn\u2019t believe inflation has been whipped. \u00a0He is rightly saying that commodity inflation has a second wave coming, confirming the analysis of myself and\u00a0Francis Hunt<\/a>\u00a0in a banger interview on Palisades Gold Radio (as I outlined in a recent\u00a0private blog post for Patrons<\/a>).<\/p>\n In fact, Powell said explicitly he doesn\u2019t see inflation coming down to the 2% target until the middle of 2025.<\/p>\nRunning out of OPM<\/h3>\n
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Marxists\u00a0<\/s>Keynesians is that Powell has them right where he wants them. Despite all of the whining, US economic data looks better than EU data by a wide margin and the summer is nearly over, meaning higher oil prices.<\/p>\n