Trump’s role in the staggering rise of the world’s oldest currency

Sell the dollar, buy gold. Few investment strategies have worked better than this over the first year of Donald Trump’s second presidency, and it looks set to continue that way.

In the past year, the dollar has undergone its worst overall devaluation since the 1970s. At the same time, the price of gold has surged nearly 75pc to record highs.

No commodity acts better than gold as insurance against inflation, financial instability and geopolitical turmoil.

Call it “Trump Derangement Syndrome” if you like, but financial markets are increasingly betting on all three.

Almost everything the Trump White House does seems deliberately designed to undermine the dollar, last weekend’s renewed attack on the independence of the Federal Reserve being only the latest example.

None of it makes any sense, including the almost certainly hollow promise to cap credit card charges.

Price controls? Milton Friedman will be turning in his grave.

Read the rest here.

‘Sell America’ trade: Dollar drops, gold surges as Trump’s Fed pressure campaign raises fears about U.S. system

Precious metals are jumping to records. The U.S dollar is dropping. Stocks are choppy.

Monday is all about the “Sell America” trade after Federal Reserve Chair Jerome Powell’s bombshell announcement that he’s under criminal investigation — which market participants see as a sign of President Donald Trump’s interest in stripping away the central bank’s political independence.

“This is unambiguously risk off,” said Krishna Guha, head of global policy and central bank strategy at Evercore ISI.

Guha said a so-called “Sell America” trade could play out similarly to what was seen in April, when the stock market cratered after Trump first announced his plan for broad and steep tariffs. Global investors will place a higher risk-premium on U.S. assets, while safe-haven trades like gold should take a leg up as a response to the turmoil, he said.

The Dow Jones Industrial Average fell nearly 500 points at one point in morning trading, while the U.S. dollar index shed 0.3%. But the popular safe-haven trades of gold and silver surged to all-time highs in the session.

“Clearly, the market doesn’t like it,” Ed Yardeni, president of Yardeni Research, told CNBC on Monday.

Read the rest here.

Ambrose Evans-Pritchard: Trump is playing with fire in his attacks on the Federal Reserve

The US Federal Reserve must henceforth be considered the personal political agency of Donald Trump. America’s monetary credibility has been utterly trashed.

The world’s superpower central bank will set interest rates at his whim, much like the Turkish central bank under the Erdogan regime.

Markets must now assume that Trump will compel the Fed to soak up America’s exorbitant debt issuance and hold down long-term interests by a form of de facto yield curve control.

They must also assume that Trump will force the Fed to press the pedal to the floor and slash interest rates far below the natural Wicksellian rate until the midterm elections are safely out of the way next year.

Trump has crossed the Rubicon by purging an independent member of the seven-strong Fed board, each appointed for 14 years with Senate confirmation and protected tenure to shield them from pressure.

He has already sacked the protected head of the Federal Trade Commission and got away with it, so the latest abuse should hardly come as a surprise.

If there were any authenticity to the sacking of Lisa Cook, one of the federal governors, under the legal category “for cause” it would have entailed a genuine probe under due process.

Trump’s obvious purpose is to bring the Fed under his full control immediately and, above all, to issue an implicit warning to any member of the Federal Open Market Committee who refuses to toe the line that they too will be disposed of if anything can be found against them – and something can always be found.

“It’s an authoritarian power grab that blatantly violates the Federal Reserve Act, and any court that follows the law will overturn it,” said Elizabeth Warren, the veteran Democrat on the Senate Banking Committee.

Her caveat is noted. It takes some courage for intimidated judges to “follow the law” in Donald Trump’s America.

The dollar was already on borrowed time as the world’s hegemonic reserve currency before the death of the Fed. The process will now accelerate, with potent implications for the dollarised system of global finance.

The Bank for International Settlements estimates that $13tn (£9.6tn) of offshore global debt is denominated in US dollars, or $35tn if you include embedded liabilities in swaps and other derivatives.

Trump can bulldoze his way through resistance within the US – and he can strong-arm foreign allies into concessions, until they cease to be allies – but there is one great immovable power that is beyond his reach.

He cannot force the global bond market to buy US treasuries and fund his debt.

The Achilles’ heel of Trumpism is that the US has a net international investment position of minus $24.6 trillion, or 82pc of GDP. It has a personal savings rate of 4.7pc, a fraction of US post-war levels or of global levels, and is living off a constant supply of foreign credit to cover day to day spending.

Read the rest here.

One additional factor not getting a lot of attention in all of this is that Trump has been investing hundreds of millions of his own money in US bonds since he won re-election. If he can force down interest rates, he stands to make a killing.

Trump's Witch-hunt at the Federal Reserve

The president is desperately looking for a legal pretext that would allow him to fire Federal Reserve Chair Jerome Powell. Details here.

The Dangerous Mythology of Central Banks (and out of control debt)

...Trump has purged the top echelons of the US military, the CIA, the NSA, the FBI, the justice department and every agency that stands in his way. It would be out of character if he spared the Fed.

His war of words against Powell is in full flight: “Low IQ ... a very stupid person, actually … terrible … a major loser … Mr too late ... a total and complete moron.”

Needless to say, Trump’s determination to get his hands on the machinery of interest rates and bond purchases is an admission that his “big, beautiful bill” is pushing the limits of US debt sustainability.

The Congressional Budget Office (CBO) says the draft will add $3.3 trillion (£2.4 trillion) to deficits by 2034, mostly from rolling over the Trump 1.0 tax cuts that were never affordable in the first place.

The US is in a runaway debt compound trap. The budget deficit is 6.7pc of GDP at full employment. The next recession will push it into double digits.

Interest costs were 1.6pc of GDP in 2018, during those halcyon days of free global money. They are 3.2pc this year and rising fast. “The federal budget has become highly sensitive to interest rate dynamics,” said James Knightley, from ING.

The US is also about to breach the Niall Ferguson rule: that great powers go into terminal decline once interest costs exceed military spending as a share of GDP.

Net public debt was 54pc of GDP at the turn of the century. It is now 121pc, rising by two points a year even in good times, and heading for 140pc in short order.

Read the rest here.

See also...

Republican Bill Puts Nation on New, More Perilous Fiscal Path

China is fortifying itself against future sanctions

China is dumping US treasuries and buying Gold

Ben Bernanke Takes Aim at Central Bank Forecasts

Central banks the world over failed to predict the surge in inflation that started three years ago. Now they’re trying to learn from their mistakes.

For the Bank of England, that meant commissioning former Federal Reserve Chairman Ben Bernanke to write a review of the U.K. monetary authority’s forecasting system. The implications of the findings, published Friday, could reverberate far beyond Britain.

To be fair to the BOE, it didn’t do particularly worse than others in failing to see that supply-chain problems, energy-price spikes, and geopolitical tensions would generate the worst bout of inflation in a generation. Bernanke, who guided the U.S. through the 2008-09 financial crisis and won the Nobel Prize in 2022 for his work on the impact of bank runs in markets, notes the shocks were difficult to forecast.

“The forecasting and policy challenges faced by the Bank of England in recent years were hardly unique,” said Bernanke, now a fellow at the Brookings Institution. “The Bank, like other central banks and policy institutions, will be working to draw the appropriate lessons from this experience.”

Read the rest here.

Inflation Hits 9%

Paging Mr. Volcker. Mr. Paul Volcker please pick up the white courtesy phone.

Bank of England raises interest rates amid warnings of recession and 10% inflation

The government is facing calls to launch a fresh package of emergency financial support for households after the Bank of England warned Britain’s economy could plunge into recession before the end of the year.

As the nation went to the polls in the local elections, the Bank raised interest rates from 0.75% to 1% to tackle spiralling inflation made worse by Russia’s war in Ukraine. With a fresh jump in home energy bills expected in October, it forecast inflation would rise above 10% this year, the highest level since 1982.

The rate rise brings borrowing costs to levels unseen since the recession caused by the 2008 financial crisis, but the Bank’s monetary policy committee (MPC) said action was warranted despite the gathering economic storm clouds.

Andrew Bailey, the Bank’s governor, said there was a “narrow path” the central bank had to navigate between the dual risks of inflation and recession facing the British economy. He said the inflation shock had been made worse by the impact on supply chains from Covid lockdowns in China and the rise in energy costs since Vladimir Putin’s invasion.

Read the rest here. 

World may be on cusp of new inflationary era, says central bank chief

The world economy may be on the cusp of a new inflationary era with persistently higher growth in consumer prices due to the retreat of globalisation, a leading central bank chief has said.

Agustín Carstens, head of the Basel-based Bank for International Settlements – which is known as the central bank of central banks – said there was a strong risk that prices would rise uncontrollably without a sharp rise in interest rates above existing plans.

In a speech setting out risks for persistently higher rates of inflation, Carstens said higher borrowing costs could be required for several years to curb the risk of spiralling prices wreaking long-term damage on the economies of the industrialised world.

However, his comments are disputed as other experts warn that high inflation will probably choke consumer spending and economic growth – reducing the urgency for significantly higher interest rates.

Data has shown inflation heading towards 10% in several countries, mostly in response to rising gas and oil prices after Vladimir Putin’s invasion of Ukraine. In February, the consumer prices index hit 6.2% in the UK – the highest level since the 1990s. In March, the CPI in Germany and Spain hit 7.3% and 9.8% respectively.

The Bank of England is on course to raise its base rate to 2% next year according to City investors, up from the current level of 0.75% after Threadneedle Street began hiking rates from a record low of 0.1% in December last year.

Last month the US Federal Reserve approved a 0.25 percentage point hike from near zero, the first increase since December 2018, with a signal it plans several more rate rises this year.

Read the rest here.

Inflation: Team transitory is getting nervous

All year the Federal Reserve’s message on inflation has been consistent: This year’s surge is transitory, and inflation will soon return close to the central bank’s 2% target.

Yet look more closely, and it is clear officials are turning less sanguine—and that explains growing eagerness to start raising interest rates.

Last September, long before the supply bottlenecks emerged, the median forecast by Fed officials was for core inflation (which excludes food and energy) in 2022 of 1.8%. Every few months since then they have nudged that up, and in the forecasts released Wednesday they see core inflation next year at 2.3%.

While current-year forecasts get pushed around a lot by temporary factors such as a jump in oil prices, the next-year forecast reflects where inflation is expected to settle once temporary factors recede. The message from the Fed’s latest projections is that “transitory” is lasting an awfully long time. Indeed, next year’s projected 2.3% is the highest next-year core inflation forecast since projections were first published in 2007, according to Derek Tang of Monetary Policy Analytics.

This might explain why the Fed is accelerating plans to raise interest rates. The Fed is now buying $120 billion a month in bonds and wants that to fall to zero before it starts to raise rates. On Wednesday, the Fed signaled it would likely start tapering those bond purchases in November, which means the process would be over by mid-2022, clearing the way for a rate increase. Half of Fed officials think rates will start rising by late next year. Just last March, a majority of officials didn’t see that happening until 2024.

What changed? It isn’t because the economic outlook is stronger. In fact, officials now see slower growth and higher unemployment than they did in March. Chairman Jerome Powell explained that some officials simply wanted more confidence the expected recovery would materialize. But inflation risks clearly play a part.

Read the rest here.

Deutsche Bank warns rising inflation could become a serious and long term problem

Inflation may look like a problem that will go away, but is more likely to persist and lead to a crisis in the years ahead, according to a warning from Deutsche Bank economists.

In a forecast that is well outside the consensus from policymakers and Wall Street, Deutsche issued a dire warning that focusing on stimulus while dismissing inflation fears will prove to be a mistake if not in the near term then in 2023 and beyond.

The analysis especially points the finger at the Federal Reserve and its new framework in which it will tolerate higher inflation for the sake of a full and inclusive recovery. The firm contends that the Fed’s intention not to tighten policy until inflation shows a sustained rise will have dire impacts.

“The consequence of delay will be greater disruption of economic and financial activity than would be otherwise be the case when the Fed does finally act,” Deutsche’s chief economist, David Folkerts-Landau, and others wrote. “In turn, this could create a significant recession and set off a chain of financial distress around the world, particularly in emerging markets.”

As part of its approach to inflation, the Fed won’t raise interest rates or curtail its asset purchase program until it sees “substantial further progress” toward its inclusive goals. Multiple central bank officials have said they are not near those objectives.

In the meantime, indicators such as the consumer price and personal consumption expenditures price indices are well above the Fed’s 2% inflation goal. Policymakers say the current rise in inflation is temporary and will abate once supply disruptions and base effects from the early months of the coronavirus pandemic crisis wear off.

The Deutsche team disagrees, saying that aggressive stimulus and fundamental economic changes will present inflation ahead that the Fed will be ill-prepared to address.

Read the rest here.

Ambrose Evans-Pritchard: The Fed has lost control of bond markets

Wild moves in the $21 trillion US Treasury market have become disorderly. Shockwaves are pulsating through the international financial system and threaten to snuff out Europe’s economic recovery before it has even begun.

Central bankers have long been fretting over what might happen if incipient inflation and gargantuan debt issuance starts to set off an exodus from global bond markets. They had their first real taste late on Thursday. The cost of borrowing rocketed. 

The US Federal Reserve in particular must navigate a narrow strait between the opposite perils of Scylla and Charybdis: damned if it does nothing, and allows the turmoil to continue; but equally damned it capitulates again, opts for easy stimulus to suppress yields, and falls even further behind the curve (in the eyes of bond vigilantes). 

As matters now stand, the Fed has lost control over US monetary policy. Investors are betting that the overhang of excess M3 money created since Covid began will combine with the Biden Administration’s war economy stimulus  - 13pc of GDP, including the pre-Christmas package - to lift the economy rapidly out of its long deflationary malaise.

Rightly or wrongly they are pulling forward an inflationary implication. Futures markets have priced in a full rate rise in 2022 and two more rises in 2023. This is self-fulfilling and will soon start rippling through financial contracts unless corrected.

Put another way, bond traders are dictating policy. They are tightening long before the Fed is ready or thinks that the coast is clear. So much for the charming idea of “running the economy hot”.

Nobody was spared on Thursday after investors shunned what was supposed to be a routine auction of seven-year US Treasury bonds, but instead sparked the worst bid-cover ratio on record (2.04) and a violent intraday spike of 30 basis points. 

The spillover smashed into the vast Japanese bond market, where 10-year yields blew through the upper band of the Bank of Japan’s yield control regime.

Australia’s Reserve Bank had to intervene with emergency QE to hit its yield target. Junk bonds fell out of bed, giving up almost all the gains since vaccination euphoria began last year. 

Equities have stopped rising in lockstep with bond yields for the first since the pandemic began. The Nasdaq bloodbath on Thursday was a sight to behold.

Ark Invest, the momentum ETF, is down 18pc over the past two days and is fast becoming a systemic threat in its own right, epicentre of a nexus of leverage. Saxo Bank warned that the “Tesla-Bitcoin-Ark risk cluster” could set off a toxic feedback loop that sucks other interlinked tech stocks into a downward vortex.

Read the rest here.

Bond yields have risen sharply, despite aggressive Fed intervention

Since August 6 of last year, the Fed has purchased $400 billion of U.S. Treasury notes and bonds. Despite that massive amount of propping up the market, the yield on the 10-year Treasury has more than doubled, from half of one percent to a yield of 1.05 percent at 7:30 a.m. this morning. That means that all of those billions of dollars in Treasuries that the Fed bought at lower yields are now trading at losses.

Read the rest here.

Bank of England hints at negative interest rates

Negative interest rates could spell the end of free bank accounts, experts warned after the Bank of England gave its clearest indication yet that the controversial policy could be introduced.

The Bank has written to UK lenders' chief executives asking them to set out their readiness for negative rates, raising the prospect of an unprecedented move below zero as the recovery begins to slow.

It could trigger massive losses for lenders. According to analysts and grandees, in an extreme scenario banks could be forced to start charging millions of customers a monthly fee. 

Sir Philip Hampton, who was chairman of taxpayer-backed Royal Bank of Scotland at the height of the financial crisis, said: "In the case where negative rates are significant and prolonged, and are charged on current accounts of ordinary earners, I think there’s likely to be a strong customer reaction and pressure to make the revenues fit the costs with more transparency. That probably means fees.

"The alternative could be negative interest rates on bigger deposits. That mainly hits the better off who can usually afford it but also pensioners and other savers. But these events often lead to something fairly radical."    

Threadneedle Street has already slashed rates to an all-time low of 0.1pc, wrecking banks' profits and landing savers with a return of close to zero on their deposits.

Read the rest here. (Paywalled)

Luke Gromen discusses macroeconomic trends

Report: The Federal Reserve to adopt multi-year pro-inflation policy

In the next few months, the Federal Reserve will be solidifying a policy outline that would commit it to low rates for years as it pursues an agenda of higher inflation and a return to the full employment picture that vanished as the coronavirus pandemic hit.

Recent statements from Fed officials and analysis from market veterans and economists point to a move to “average inflation” targeting in which inflation above the central bank’s usual 2% target would be tolerated and even desired.

To achieve that goal, officials would pledge not to raise interest rates until both the inflation and employment targets are hit. With inflation now closer to 1% and the jobless rate higher than it’s been since the Great Depression, the likelihood is that the Fed could need years to hit its targets.

The policy initiatives could be announced as soon as September. Addressing the issue last week, Fed Chairman Jerome Powell said only that a year-long examination of policy communication and implementation would be wrapped “in the near future.” The culmination of that process, which included public meetings and extensive discussions among Fed officials, is expected to be announced at or around the Federal Open Market Committee’s meeting.

Read the rest here.

Meanwhile gold hit a new record high today, closing up more than 2% at $2036/oz.

Trump Isn’t the First President to Make War on the Federal Reserve

Nixon bullied his Fed chair into lowering interest rates — a political move that wrecked the economy for years.
 

Taking to Twitter late last month, President Trump made clear that when it comes to the economy, the real enemy is not in Beijing, but just down the street from the White House, in the headquarters of the Federal Reserve. The Fed’s chairman, Jerome Powell, had recently led his board in lowering interest rates by 25 basis points, a smaller increment than the president desired. “China is not our problem, the Federal Reserve is,” the president wrote.

Such audacity may feel uniquely Trumpian, but it isn’t. Though our modern political culture holds that the Federal Reserve is independent, other postwar presidents have bullied Fed chairmen just as egregiously. President Lyndon Johnson pushed Fed Chairman William McChesney Martin against a wall after Martin dared to raise the discount rate half a percentage point.

But the worst example is President Richard Nixon’s campaign to coerce “his” Fed chairman, Arthur Burns, into promulgating policy that guaranteed devastating inflation. Worst, because it worked — and demonstrated that this economically vital, supposedly apolitical agency is more vulnerable to presidential meddling than we’d like to believe.

Read the rest here. 

Amity Shlaes is no left-wing moonbat. She is an old right conservative whose recent biography of Calvin Coolidge is sitting on my bookshelf. But what even she dares not mention, is that the world is drowning in debt and the central banks are already up to their eyeballs in money printing and aggressive manipulation of interest rates and financial markets. Their sole function at this point is to keep the bubbles inflated for as long as possible. Trump really aught to read "This Time is Different- Eight Centuries of Financial Folley" by Carmen Reinhart and Kenneth Rogoff (also on my bookshelf). I'd offer to lend him my copy, but there aren't any pictures.

Former Bank of England chief warns of looming financial crisis

The world is sleepwalking towards a fresh economic and financial crisis that will have devastating consequences for the democratic market system, according to the former Bank of England governor Mervyn King.

Lord King, who was in charge at Threadneedle Street during the near-death of the global banking system and deep economic slump a decade ago, said the resistance to new thinking meant a repeat of the chaos of the 2008-09 period was looming.

Giving a lecture in Washington at the annual meeting of the International Monetary Fund, King said there had been no fundamental questioning of the ideas that led to the crisis of a decade ago.

“Another economic and financial crisis would be devastating to the legitimacy of a democratic market system,” he said. “By sticking to the new orthodoxy of monetary policy and pretending that we have made the banking system safe, we are sleepwalking towards that crisis.”

He added that the US would suffer a “financial armageddon” if its central bank – the Federal Reserve – lacked the necessary firepower to combat another episode similar to the sub-prime mortgage sell-off.

Read the rest here.

Decades of overt government manipulation of financial markets via interest rates and money supply may finally be reaching the point of being ineffective.

In Search of the Effective Lower Bound

The Fed is no longer talking about zero-bound but effective lower bound. What's the difference? Where is it?

Read it here.