“I must admit that in my 40 years in this business, I have never seen a President openly call for the resignation of a Fed Governor (Lisa Cook).” -Influential economist and market strategist, David Rosenberg
Hello, Subscribers:
We’ve written a fair amount recently about the relentless political pressure being placed on the Fed. As anyone who has read my book Bubble 3.0 is aware, it’s my contention the Fed is primarily to blame for the series of bubbles and busts we’ve experienced, with increasing frequency, since the late 1990s.
Accordingly, I’m very receptive to the idea of sweeping reforms to America’s central bank. In fact, I believe they are essential. However, the forces being brought to bear on it currently are not focused on restoring sound money policies at the Fed. Rather, it is being cajoled, brow-beaten, and harassed into behaving in an even less responsible manner than it has when left to its own easy-money devices. (As a reminder, the U.S. dollar held its value admirably from the late 1700s up until 1913 when the Fed was established; since then, the greenback has lost about 97% of its purchasing power.)
Unquestionably, there have been numerous times when the Fed has attempted to tighten monetary conditions. Actually, its restrictive actions since the post-pandemic inflation eruption – including dramatic rate hikes and a partial reversal of its money-printing (QE) adventures – were bold, albeit inexcusably delayed. Despite the tardiness, even a Fed critic like me needs to concede they’ve been reasonably effective.
Unfortunately, though, Jay Powell & Co. have not been able to force inflation down to its 2% target, despite some questionably accurate accounting. As we noted last week, if the CPI tabulation methodology used prior to the 1980s was still in place, inflation would be running more than double what is officially reported.
Mr. Powell’s term as Fed Chairman ends next May, but, as we’ve noted before, the Trump administration is doing all it can to push him into premature lame-duck status. This includes the threat of appointing a new Fed-head well in advance of Mr. Powell’s swan song.
In my view, Mr. Powell will put up a valiant fight. He likely envisions that being the lead defender of the Fed’s independence might burnish his place in the central bank’s history books. It’s simply factual to point out that his legacy was greatly tarnished by his repeated miscues, especially the inflation explosion he allowed on his watch in 2021 and 2022. For those who have forgotten, he was still running the Fed’s digital printing press via quantitative easing in the first quarter of 2022 despite that inflation was roaring at the time.
To his credit, Mr. Powell has been able to bring inflation down materially, even if not to the Fed’s 2% target. Additionally, he has been able to do so without triggering a broad recession versus what has been more of a series of rolling contractions. Frankly, I didn’t think he could pull it off; thus, a Haymaker hat tip to the Fed chairman is warranted. However, I doubt that will be of much solace to him when so many in positions of power are screaming for his scalp (and he does have an impressive head of hair for a man in his early 70s).
As I look forward a few months to when a new Fed chair is waiting in the wings, one almost certain to be far more pliable to Oval Office “guidance”, there is good reason for concern. In addition, there are the implications of massive re-shoring of production to the U.S. and the far higher costs that entails. Consequently, I have a hard time seeing inflation staying below 3% (based on government-issued CPI data). When it comes to hitting the Fed’s 2% number, that is likely to continue to be the Impossible Dream, barring a serious recession.
The increasing desire on the part of the Trump administration to materially depreciate the dollar is another reason I just don’t see the CPI staying tame, at least looking out a year or two. Much lower short-term interest rates, which Team Trump also desperately seeks, should push the buck lower, but they may also cause longer term rates to rise. If this seems improbable, please realize that’s exactly what happened last year when the Fed cut by a full percentage point over the last four months of 2024.
The yields on both the 10-year and 30-year U.S. Treasury bonds remain well above where they were prior to those fairly aggressive rate reductions. (Considering the dovish nature of Jay Powell’s Jackson Hole speech last Friday, and the wild stock market celebration of it, the bond market’s muted reaction might be telling. One overlooked hawkish utterance by Mr. Powell on Friday was dropping the Fed’s five-year long dalliance with encouraging inflation to run above target at times. Note “encouraging” versus now when it’s been working hard to push it down to 2%.)
Along similar lines, a recent Adam Taggart podcast I listened to has been reverberating in my mind. The man who may be the world’s foremost liquidity expert, Michael Howell, was Adam’s guest earlier this month. As usual, he came armed with an array of intriguing charts.
One of those showed global central bank liquidity. Per that visual, it has risen to a level nearly equivalent to where it was during the pandemic. It is even closer to the apex seen during the 2008/2009 Global Financial Crisis (GFC). Amazingly, per this visual, there are even more central banks easing now than there were back then (dotted line below).
Moreover, this central bank liquidity blitz is occurring with the Fed still at least mildly restrictive. Should it join the party, the liquidity apex seen during Covid and the GFC could easily be exceeded. Regardless, there are oceans of money coursing through the planet’s financial arteries right now and that’s likely to become even more pronounced. China, in particular, is in hyper-stimulus mode.
Michael believes the Bank of China, which has already injected $1.5 trillion U.S. into its economy, is ramping up to do another super-sized infusion. Now here’s the kicker, and it sets up my usual pirouette from macro to micro (i.e, from big picture to specific investment ideas): Michael’s extensive analysis of past liquidity cycles indicates commodity prices are highly sensitive to the Bank of China’s actions. In other words, when they are in full-on stimulation mode, commodities rip.
It wouldn’t be a Making Hay Monday (MHM) without at least one breakout chart, though we ran this last week. It’s such a good fit with this MHM and my highlighted investment suggestion, that I feel re-running it is appropriate.
CRB Index since 2020 with overhead resistance drawn in
As you can see, the Commodity Research Bureau (CRB) Index is making a valiant effort at breaking above multi-year resistance. Based on what’s happening with global liquidity, in general and the Bank of China’s efforts, in particular, I believe a breakout is exceedingly likely.
When you combine the above graphic with the one immediately below, from my great Kiwi mate, Trader Ferg, the potential for another multi-year up-phase in commodities strikes me as also highly probable. (Ultimate credit for this visual should accrue to the fine investment firm of Incrementum.)
The emerging perception that the Fed seems to be ready to revert to its “Big Easy” monetary policies of most of the last 17 years, even with Jay Powell still at helm, only pours napalm on the fire. It would be unprecedented for the Fed to be easing with unemployment as low as it is, inflation as elevated as it is and animal spirits (i.e., speculation) as feverish as they are… but that looks to be exactly what we’re going to get. Then there is that little issue of tariffs that not long ago was rocking the world. Now they seem to be a non-event, except when it comes to inflation. Most assume the tariff impact on the CPI will be “transitory”. However, even the man, the same Jay Powell, who made that word famous (or infamous) back in 2021 has his doubts.
But which commodities to focus on as a diversified investor?