The Crushing of Inflation Expectations
Macro Perspectives
Just in case we thought the Bank of England's intervention in the government bond market signaled a course correction for the Fed, we were disabused of that thought yesterday.
The Fed lined up three speakers, all affirming the draconian rate outlook (hawkish). And they put two on the calendar for today (Brainard at 9:00 EST, and Bowman at 11:00 EST), who undoubtedly will have the same message. Moreover, the European Central Bank is following the same playbook, having lined up media for numerous ECB governing council members to promote the narrative of steadfast loyalty to the inflation fight (i.e., telling us that tough rate hikes will persist).
Meanwhile, they all support the Bank of England's flip-flop on bond buying (a monetary "easing" tool that is a counterforce to the Bank of England's own interest rate hikes). And of course, as we know, the European Central Bank did a similar flip-flop over the summer. They are outright buying government bonds of vulnerable euro zone countries while also raising interest rates.
How does this make sense?
As we know, since the Great Financial Crisis, the major global central banks have done nearly everything in coordination. They continue to coordinate. In fact, Jerome Powell subtly said in his last press conference that he had just returned from Basel, Switzerland, where he was meeting with other central banks.
It seems that they are focused, in coordination, on crushing inflation expectations and therefore demand. Meanwhile, as their policies destabilise the financial system, they unapologetically intervene to absorb the shock.
That brings us back to an image from one of my April notes, as we were discussing the plans of the central banks to exit QE. The problem: we've yet to see an example of a successful exit from QE. Here we are again. The attempted exits have only led to more control and more intervention by central banks over markets—to plug new leaks in the global economic system.
The question now is, have the central banks lost credibility, and will the markets, this time, test them (i.e., continue to put pressure on currency and government bond markets)?
We seem to be at that point.
That said, when the biggest and most powerful central banks in the world are coordinating (the Fed, ECB, BOJ, BOE, SNB, BOC), they can't be beat. In their own words, they will "do whatever it takes" to maintain stability in the financial system—they will keep plugging holes in coordination.
So what's the end game?
This all continues to progress toward the eventuality of a coordinated reset of global debt and a new monetary system.
At Gryning I believe that offense wins games, but defense wins championships. In an investing context, that means long-term capital growth while reducing drawdowns in the interim.
If your looking to accomplish this, at a fraction of the cost of a hedge fund strategy, consider joining The Gryning Times as a paid subscriber.