'Powell provides an easy target these days. But when it comes to the “neutral rate” discussion, the entire economic community is implicated. The concept has never been on sound footing. As far as I’m concerned, the entire concept of calibrating monetary policy based upon some nebulous “neutral rate” is indefensible. Analytical quicksand.'
- Doug Noland,
Indefensible Neutral Rate Doctrine, August 5, 2022
'In short, global markets were “seizing up”. With multi-trillions of market risk offloaded to the derivatives markets, the system was at a critical juncture. If de-risking/deleveraging continued, the scope of derivatives-related selling pressure (“delta” or dynamic trading to hedge protection written) would overwhelm the marketplace.
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It’s worth underscoring that a serious global crisis of confidence was materializing around a big quarter-end U.S. derivatives expiration. The structure of U.S. and global derivatives hedging markets has created a weak link within the global financial system. Market participants have been conditioned to hedge in the derivatives markets, creating vulnerability for a self-reinforcing (1987 “portfolio insurance,” but so much bigger) crash dynamic. Such a collapse would destroy faith in the central bank “put,” essentially creating a crisis of confidence in Market Structure and central banking.
At least for this round, perceptions held that central bankers retain the capacity to stabilize markets. And now markets are weeks into a major unwind of hedges and short positions, a dynamic that unleashes smoldering speculative dynamics. Short squeezes are back, meme stocks are back to life, and FOMO is forcing the under-invested to get their exposures right back up. A bear market rally or a more sustainable market recovery? That’s not the point. With current Market Structure, destabilizing speculative excess is always festering just below the surface. This is a serious dilemma for the execution of monetary policy.
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..Barring a market accident, inflationary pressures will not be contained by the level of Fed funds currently anticipated by the marketplace.
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I also worry about the hedge funds. This rally has caught many funds poorly positioned, only compounding performance challenges. As a whole, the industry is under intense performance pressure. Most funds have no choice but to plug noses and jump on the rally. They’ll also be the first to liquidate come the next leg of the bear market, selling right along with the derivatives players as a panicked marketplace rushes to reestablish hedges. And if the recent loosening of financial conditions has been spectacular, just wait until the next de-risking/deleveraging-induced tightening. Let’s call it what it is: Epic Monetary Disorder.'
- Doug Noland,
The Everything Squeeze, Agust 12, 2022
Context '..I’ve lost all respect for monetary economists..'((Hapto)praxeology) - '..Mises’s warning to the world .. not to suppress the market rate of interest in the name of creating prosperity.''..Mises .. his analysis of the monetary system and the problems association with the manipulation of money and credit..'Mises - Money and Credit - '..the recession was a problem of under-saving, and over-consumption..'(Praxeology) - '..Menger’s experience stressed subjective factors..'(Banking Reform) - '..For Saravia de la Calle, those who engage in fractional reserve banking commit a mortal sin..'Hayek Was Right, Keynes Was Not An Economist - '..Keynes ducks entirely the role of bank credit in inflating the money-quantity..''..asset inflation is the most dangerous type of inflation..''..the “middle class” suffering disproportionately from inflation and Bubbles..'(Global Stagflation)(Shrinkflation) - Inflation and wage data suggest US prices will keep climbing - 'UK .. grocery prices rise by more than 20%'(Disaster)(Fed, ECB way behind the curve) - 'US Inflation Quickens to 9.1% .. relentless price pressures..' - 'Inflation at current levels is a severe economic, social, and political problem..'Food at Home is Up 13.1 Percent From a Year Ago, Most Since February 1979, August 10, 2022
SF Fed President Mary Daly: "I Don't Feel the Pain of Inflation Anymore." August 3, 2022