“I seek the night and I rest my head on my weary bed and I think about you. And time’s on my mind I’ve been thinking about what I’m without with a boy like you What’s a girl to do.”
No, these words aren’t my nightly dream about what Jerome Powell is going to do, well now hold on. But these words written by Neil Diamond were sung by a heartless hussy named Lynn Halsey Taylor in the movie Any Which Way but Loose. Well, the song ends with her asking over and over What’s a girl to do, What’s a girl to do? This Siren’s song may have been enough to catch clint Eastwood, but they call them sirens for a reason. They are a warning.
Well, I spent the weekend listening to everyone browbeat my last Jedi Jerome Powell until I was left wondering what is the old boy to do, what’s the old boy to do? Powell sits quietly, almost nobly. He speaks when required and does a great job of saying almost nothing, which is what he wants to do. He is a very hateable man right now. Not as a man per se but the seat he occupies is such an easy target. He doesn’t fight back on Twitter like the other 13 year old keyboard jockeys. He acts presidential even if he is only the Chairman of the Federal Reserve. An institution that I do not like, thinks should be abolished, and yet I wonder what’s my boy to do? Trump, analysts, the media all calling for Powell to lower rates like that is some mythological key to unlocking the secret to getting to buy now and not pay later. Sirens in Greek mythology were famous for luring sailors into crashing their boats on the treacherous rocks of their shores. I think the mainstream media, Trump, and the administration are all luring Powell into a shipwreck with their modern day song sung in 140 characters or less and out of key. I was a devout Powell fan, but I backed off a little bit last September when he lowered rates right before the election. People assume he was playing politics and maybe he was but maybe he wasn’t. The entire board of governors were playing politics then, at least the voting members.
However, there is one teeny tiny little detail that no one seems to be mentioning about why Powell seems like he is in quicksand right now. Trump had to pivot last month because of the long end of the bond market sold off so fast and it caused yields to rise to the current 4.5% levels. They yields actually went down after Trump pivoted but they have actually went higher than where they were last month because the pivot only delayed what is quickly becoming an undelayable problem. The problem everyone is overlooking is that the last time Powell lowered rates, the long end of the bond yield curve rose and rose sharply. If you will indulge me in this next segment that I call C Thomas looks at a 10-year bond chart and describes it.
In the first week of March 2023, a large selloff and spike in yields happened to coincide with the failure of Silicon Valley Bank. Coincidence, perhaps? There was a rush to safety in bonds as yields dropped and bonds rallied. However, the in the next 7 months the 10-year yield rose from 3.30% to 5% while the stock market sold off and then Janet Yellen announced her “pivot.” She would sell more short-term t-bills and simply sell less long term debt. No one was wanting to buy them anyway as yields were going higher in search of a buyer. The stock market loved the idea and long term yields fell by more than 100 basis points. Coincidence, perhaps . Yields then started to climb again into the summer and then words of Jerome Powell’s pivot started driving yields down again. He was finally going to pivot. This is where I was unhappy with my Jedi who had raised rates faster than anyone had ever done before, even Paul Volcker. Yields on the 10-year yield were at 3.65% when Powell pivoted in September. Rates would go down, people would be able to afford houses again. The real estate market would be unlocked, the commercial real estate market would get a reprieve , the zombie companies would be able to refinance their losing companies and roll their debt, and the banks themselves would get relief from their unrealized losses from their too large portfolio of bonds on their balance sheets. All things we talked about right here. All things waiting for long-term rates in the 10-year yield to fall. Since then, the 10-year yield spiked to 4.8% in January and currently sits at 4.5%. We are almost 100 basis points higher and the exact wrong result for everyone involved. Please understand that Jerome Powell might be scared if he cuts rates again, the long end of the yield curve might go up again and that caused the president to bail on his favorite word in the English language tariffs. What a Fed Chair to do, what’s a Fed Chair to do?
He did lower rates, and the 10-year yield made a u-turn faster than Trump’s tariff policy. The stove is hot, and Jerome don’t want to touch it again. Then you get this little situation from ZeroHedge, “While the world was closely watching if US Treasuries were going to crater after Friday’s Moody’s downgrade (they didn’t, and in fact yields closed near session lows as Moody’s didn’t tell us something we didn’t know for almost two decades), the real bond market collapse was taking place half a world away, in Japan, where moments ago Tokyo just had its ugliest 20 Year JGB auction since 1987.
Despite yields at multi-decade highs, and in the case of the 40Y JGB, at never before seen levels…… ahead of today’s auction of 1 Trillion in 20 Year (March 2045) JGBs, closely watched for insight into demand for next week’s all important 40 Year “mega duration” auction, the results were nothing short of catastrophic with a Bid to Cover of 2.501( down from 2.96 last month), the lowest since 2012… … but it was the surge in the tail to 1.14 from 0.34 in April – the biggest tail since 1987(!) – that was the real shocker, as demand for Japanese duration has suddenly evaporated.”
Since the bottom of the Trump tariff tissy, the 30-year JGB has risen about 90 basis points compared to only 50 basis points for the American 10-year treasury. This is like two Stepford wives, who could both use to lose 15 pounds talking about their absent friend Jenny who could use to lose 30. Another cup of tea Margaret, why certainly. And another biscuit, oh no I really shouldn’t. But they are so good aren’t they, I don’t know why I even choose to buy them somewhere besides NR’s. I know, well maybe just one more, it isn’t like we are Jenny, now is it? That’s right, the swords that stab backs also cut cookies in Stepford country.
Back-stabbing is not a lost art in Washington DC, that’s for sure. Powell is stuck, if he lowers interest rates, inflation might return especially with looming tariffs right around the corner. That’s not to mention that the last time he did, the damn 10-year yield did the exact opposite thing that everyone wants. If he does nothing, the economy drifts further into recession and the institution that is supposed to come to the rescue is seen as always late Jerome. That’s Trump’s new name for him.
We have long talked about how Powell is in a terrible position, inflation or depression. That’s your two choices. I have said that I think as all governments do that they will choose inflation. That means print more money, kick the can further down the road, and pray. Well Jerome gets to see what prayer does for you. He has no further to look than Japan. This from the same ZeroHedge article, “And so the BOJ is stuck: does it proceed with aggressive (or not so aggressive) QT and send yields soaring even higher and faster, causing devastating Mark to Market losses for all holders of JGBs, until eventually the BOJ is forced into yet another bailout, including NIRP and Yield Curve Control… or does the central bank capitulate now, cut rates to zero – or negative – and regain control of the long end via brand new QE/YCC, as it watches inflation transform into hyperinflation and the yen crater, resulting in currency collapse.
In other words, there is no happy ending in Japan… in fact, there are only very unhappy endings: as we asked earlier, there are really just two choices: does BOJ immediately go back to NIRP and YCC to save the long-end of its bond market (and spark inflation and currency collapse), or does it do nothing, and watch as plunging bond prices triggers a cascade of local bank failures?”
The main difference is that we are behind Japan by a few years. Their debt is a little higher as a percentage but much lower than ours, their economy is a little smaller, and we have the reserve currency because well who can forget Hiroshima and Nagasaki. That’s why we have the reserve currency, and they don’t. Powell is in the same spot. We saw Yellen pivot, can’t do that again. We are having trouble selling debt at the long end of the curve as well. Our yields are expanding just not as fast as the fat kiester on our favorite Stepford wive, Japan.
There is only one problem with this logic. It is the playbook, the Fed playbook, and what everyone thinks will happen, should happen, should have already happened. It won’t work. One of the things we like to explore here at the CTPC is an open mind. I mean wide open. I mean short of taking them mushrooms that make you see stuff open. So I posit to the Fed chairman. Let’s open up our options a little. Hold on people, if you thought tariff tantrum was wild we are about to embark on Paul Volcker 2.0, Powell’s own favorite.
Jerome, reach down, verify your manhood is intact, and walk into a press conference and say this. “We will be raising interest rates every week until the tariffs are taken off, and the new budget resolution bill is passed and doesn’t add one red cent more to this country’s nation debt. The spending stops here and on my watch, or savers will be adequately compensated for their time and money. That is all.” I would recommend walking out heading to a newsstand buying an Antonio y Cleopatra Grenadier cigar and puff on that thing like Paul Volcker used to. Paul Volcker was the most powerful man in the economic world in the early 1980s, not Jimmy Carter, not Ronald Reagan. Paul Volcker. The next time Powell is summoned to Congress, instead of saying what he always does which is the Fed doesn’t speak about fiscal policy, he should say your spending is ruining this country and I will not allow the American people to be hoodwinked by you politicians getting rich any longer. The red headline scrolling across the CNBC ticker would say “Powell raises rates in emergency rate cut, says tariffs and spending must go.” Trump could fight it and perhaps he would but the stock market would roll over so fast that he would do what he does which is pivot. Tariffs would be off in days. The people would quit having to pay a tax in effect having the government taken back out of their pocket. Congress after seeing their constituents get a tax cut, which tariffs are, taken off by this wispy man smoking a cigar would call up and say we will take some more of him and less of you. Stop fighting over pork and let’s start making bacon. Its such a foreign concept of actually having a hero that would stand up for the people, not in words but in actions, that Jerome Powell would ride that popularity into the White House in the year 2028 of our Lord. Ok, I got a little carried away.
However, the first thing that would happen is Elizabeth Warren would faint dead away and they would have to take her back to her tipi for reviving. Donald Trump would lose his temper and try to fire Powell. Congress who actually could revoke the charter of the Fed technically might even try and do so. However, juxtapose these three scenarios with the reaction to the American people. They know that this government, and the one before this , and the one before that one were all screwed up. They all know they are losing, and Musk, Trump, and Bezos are winning. Higher interest rates versus stopping the deficit. Stop the money printing. It’s what we need if we are going to avoid the Japan route of kicking the can down the road until we are forced with default or hyperinflation. Why not try and preemptively, okay we are probably past that, but if you needed to sell debt, what is a better line than we are going to be fiscally responsible and rein in our looney politicians on both sides of the spending aisles.
When Volcker did something similar, tractors drove on Washington, he got death threats, and everyone hated him for throwing them into a huge recession and then again. He smoked those cheap little Grenadiers and he stuck to his guns. He had the ability to raise rates much higher because the debt to GDP was much lower, but Powell can achieve the same thing. He takes the government hostage with monetary policy and says when fiscal policy gets in order, I will accommodate you. I’m getting a little lightheaded right now just thinking about it, like I have been taking the vapors or something.
I realize the chances are low that this scenario happens, but it’s what a Fed Chair should do. Powell is out of options and staring at his fate in Japan if he continues, and only by avoiding the prevent defense and attacking the true cause of the problem can he win. It’s the only way he can do his job which is provide stable prices and full employment long term. Who knows the long end of the curve could actually decline, because we finally have an adult in the city. Sometimes you have to break a few eggs to make an omelet, and as Trump is so proud of telling people, and wrong, eggs are down 87%.
Sincerely Yours,
C Thomas Printer
Also born on this date… three great philosophers who gave us these quotes in order, “ Damn right I like the life I live, Cause I went from negative to positive,” “if you do not take an interest in the affairs of your government , then you are doomed to live under the rule of fools,” and “I pity the fool.” That’s right, The Notorious B.I.G., Plato, and Mr. T.
Thank you for listening today and you can find all of our articles and more on our website cthomasprinter.com.