Marshal Powell Shot All the Bond Vigilantes Dead!

Surely the name tag is meant to be ironic.

It hardly seems like a month ago when Powell claimed the Fed may be able to stop doing its own dirty work because it had deputized all bond investors into doing the job for it. Then he turned around yesterday and shot them all! It was such a shocking move that even those who already had Zero faith in Powell are puzzled as to why he caved in.

Zero Hedge, which was rapid to claim Powell had done exactly as it had been predicting he was about to do for more than a year and half, spent a whole article today wondering why on earth he did such a thing! Even to them it seemed almost unbelievable in light of where inflation is going. ZH offered a few answers, including some I had offered to a reader who commented here on yesterday’s article, titled, “Powell Goes Full Dovetard and Sticks a Knife in His Own Throat,” in which I suggested Powell had just committed financial suicide in full public view. The comment opened as follows:

I've definitely got more sorting to do to figure this out, but pressure from Biden or Powell's hatred of Trump because of how Trump kept beating him up to get lower rates both seem like strong possibilities (likely both happening together).

(My attempt at sorting will come in this weekend’s “Deeper Dive,” but I think the answer here may be as much sense as we can get out of his move. So, I may focus more on what naturally comes next.)

This wound up being the answer that Zero Hedge settled on to explain why the marshal was out in the middle of the town’s Main Street flip-flopping around like a landed flounder in a hot desert: Powell is playing election engineer to help Biden beat out Trump.

That was certainly one explanation that made sense of the insensible to me: effectively, “It’s an election year coming up, and nothing else matters.” Thus, he switched from a year-long-plus path of battling Bidenomics to assisting it in ‘24 now that Trump increasingly looks like he can “Beat Back Biden.” (My suggestion of a new slogan.)

Other solutions to the human riddle that is marshal of this here town from my comment were …

The obvious fact that the government cannot sustain its debt any more at market-determined interest rates without the Fed jiggering the market down to help the government out seems also likely and may be concurrent with the first two reasons.

Fear of a deep recession suddenly appearing on the Fed's horizon out of its blind spot seems an even more likely reason (and could also be concurrent with all of the above). If the Fed suddenly realized, yes, recession is forming after all, that could cause them to take the chance with inflation. That will prove to be a damaging and cowardly decision if that is where they ultimately decide to go.

The bond vigilantes had been clearing the Inflationistas out of town like this (from another comment):

Knowing the Fed wasn't in the game anymore and was pledged to stay out in order to fight inflation, investors demanded higher yields, forcing the government's debt costs way up. That forced banks that didn't want more bonds to take on more bonds because they couldn't find enough buyers to replace the Fed as buyer of first resort.

To do all of that, bond investors demanded more interest on government debt, forcing interest up on everything pegged to government bonds (which is virtually everything), and that is what was doing the Fed’s dirty work for them.

Now we’ve got a problem as my comment also laid out:

We are right back to the 70s where the Fed too easily believed it had won and quit fighting and started actually loosening (not even "holding" for longer). That is what Powell appeared to be saying the Fed will likely do in 2024. They will carry out assuring him of his worst inflation nightmare. With inflation already rising insidiously, it will break out in the open in a burst upward if the Fed actually starts loosening.

Which is what had the writers of so many articles today scratching their heads as to what went wrong with the local marshal. Did he suddenly get a bad case of head scabies and go crazy?

Well, the marshal answered the press this way on that one: he said that the town’s supply problems were over, so half of the inflation equation (= too much money meeting too few goods) was over, so inflation would die now. These were, of course, the same supply problems that bedeviled his earlier premature obituary about inflation’s impending death: it was as good as dead because the pandemic supply problems were transitory and would resolve themselves as the pandemic lockdowns went away. Well, now he believes they have resolved.

For my part on the new transitory narrative:

I disagree with Powell in his estimate that they are nearly over…. I believe there is a fair likelihood that those shortages will return after the droughts we had this past summer, the continuance of war in two major areas, the drying up of the Panama Canal. Already, some shortages are showing back up. I think there is a fairly strong likelihood that oil starts going back up, turning from a negative impact on inflation to, at least, a slightly positive impact. Not saying for sure that will happen; but, the reasonable likelihood, makes Powell's move unbelievably dumb because the Fed will look insanely stupid if they repeat the mistakes of the 1970s and take inflation to an even higher level.

Looks like insanely stupid could already be on the menu because today’s news also contained the following headlines on inflation:

• U.S. crude oil rises 3% on weaker dollar, slightly improved 2024 demand outlook

• Oil Rises From Lowest Since June After US Stockpile Drawdown

• Eggflation Returns As Top Producer Hit With Bird Flu In Kansas

• Global Supplier of Crucial Electrical Products Announces 20 Week DELAY in most-important parts!

It might have been a little silly and premature for the marshal to assume that all the bad guys (the Inflationistas) were packing up to leave town in a hurry now so he could go ahead and shoot all the bond vigilantes he had deputized. The last headline is particularly interesting because this is from a major company that supplies critical components to the US power grid, and they are saying their production is delayed nearly half a year for any orders that come in at the start of 2024. If a company that important is seeing major delays, how many others are and are just not coming out with it as that is not a popular kind of thing to say unless you absolutely must?

Gee, that sounds a lot more like the familiar pandemic plague of economic woes than it does like a 2024 free of the supply shortages that were half the cause of too much inflation. Now the Fed is talking about making sure its half of the inflation equation gets back in the game by going back to looser interest.

Let me note again, though, that the Fed has not pivoted … yet. It has merely talked about pivoting at last, and that was all it took to wipe out a major part of the tightening they had put in place, which they hoped the stock and bond markets would maintain on “autopilot” for them. Of course, we had already seen how the Fed’s “continue on autopilot” works last time Powell said that in 2017 about the Fed’s QT.

For now, all the Fed has said is that a return to easing is a strong possibility in '24. Its a Faustian bargain if Powell makes it; but there are likely a few months between now and the time when his Federales think they might make that move, and inflation isn't likely to keep its head low during that time; so, they'll find themselves cornered by their own plans and will have to choose one bad alternative over another.

I’m staying with my mantra. In short form, “No pivot!” As I’ve explained a few times, though, in its complete form that means “The Fed will not pivot until something major breaks and sends the economy deep into recession.”

So, that raises the final point I made in my comment above and brings up an article today by David Rosenberg, who agrees with the point I considered the most likely explanation for Marshal Powell’s head popper:

David Rosenberg: The Fed just woke up and smelled the recession

After sifting through the United States Federal Reserve’s forecasts and Jerome Powell’s cadence at the press conference, it seems the entire two-day Federal Open Market Committee meeting this week was spent discussing one thing and one thing only: how far and how fast to cut rates over the next two years.

So why did the Fed pull this mea culpa on Dec. 13? The answer is that the Fed is increasingly looking beyond the incoming and oft-revised economic data (with lower-than-normal response rates) and focused much more on what its business contacts are telling them. Nobody seems to believe a recession is plausible and yet the most recent Beige Book shows two-thirds of the U.S. is either flatlining or contracting outright (not one is accelerating). This is a greater share than we saw heading into the 2001 and 2008 recessions.

The Beige Book confirmed our suspicion that the third-quarter gross domestic product report was an aberration and likely borrowed heavily from future growth…. Going to “slowed” [in the Fed’s FOMC meeting summary statement] from “little or no change” [in the previous meeting’s summary] is contraction when you look at the wording from a perspective of economic momentum.

As one reader said in his comment to me,

All I can do is observe and adjust to the best of my abilities. However, reading Powell's comments yesterday it felt like the words of someone being held hostage. Either that, or he has no morals or true convictions and will change his tune at a moments notice to suit whatever fancies him at the moment. Reality be damned.

“Reality be damned,” said the marshal as he shot all his deputies. “Reality be damned!”