Welcome anon to another week of paid content. (And to those free subscribers getting lucky this week)
This will likely be one of the most impactful macro weeks of them all as the US FOMC will be deciding the future narrative and deciding how retail views the US dollar itself, so buckle up for an eventful week.
Please refer to the Backdrop Post and trade with mindfulness.
Please refer to Definitions page for any terms or abbreviations that I use that you don’t understand. If a term is missing, please let me know.
Please feel free to skip around or ignore certain sections if it does not apply to you. The Table of Contents is made to preserve your time in this manner. You can always simply read the conclusion if you are in a hurry.
All times given in this update are in US Central time (UTC-6 clock).
Song of the week - Comethazine - Spinback
Table of Contents
Mindfulness of Vacation and a Giveaway
Economic Calendar
US FOMC Interest Rates
Bank of England Interest Rates
Geo-Political Escalation
Conclusions
1. Mindfulness of Vacation and a Giveaway
As I stated previously, I took a trip and left home for about 3 weeks, I traveled around Texas, and then met the guys from the Against The Mob podcast for the first time out in Angel Fire, New Mexico. It was a great trip, I went snowboarding for 4 days while I was there and we recorded about 7 hours of podcast content where we tried to stay non-political (and did a decent job too), and otherwise just cooked great food, watched movies, hung out in the hot tub, looked at the stars, and just enjoyed the weather. It was a beautiful home and was ski-in/ski-out directly on the slopes at Angel Fire. I will let you all know as content from that trip becomes available online.
I had purchased a laptop prior to leaving so I could continue to do this as I have turned in my work laptop and the only other laptop I have here is dedicated as a TV laptop for the living room. Windows 11 was an incredible pain to use and after trying for a little bit I just set the laptop aside and ignored it. Which is why all of the paid subscribers have been comped an extra month. As I stated a couple days ago, I don’t want any of you to be charged for less than 8 quality posts per month.
Sometimes you need time to yourself, and I think maybe I needed some time like that. I ignored my crypto wallets, ignored the substack (but was obviously active on IG), and just stopped trying to force it on a laptop that was slowly enraging me with every passing minute. It’s been a long time since I’ve had to wait 30 seconds for a computer to register that I had typed something, and I refuse to sit through that again. Maybe I was angrier because of the issue with my bank accounts, maybe because a few other things hadn’t gone my way, I’m not really sure, but either way, I really benefitted from the vacation as I hadn’t been on one since May of last year when I went to Rocky Mountain National Park, and then went to rural Missouri/Arkansas for a river trip.
The Giveaway
Too many people are too eager to leave the country when they want to vacation. I think that is vanity and likely status seeking. And I get it, you can’t normally afford to go overseas, and the moment when that becomes available to you, the impulse is to presume it is better than a domestic vacation because it is more exclusive in that sense. As with everything else, the impulse is false. Don’t get me wrong, I absolutely treasure my trips overseas to Asia, Europe, and South America, they are all treasured memories to me, and I would still love to go to Africa, and Antarctica. There are a few things that can only be done in one specific country, when you travel overseas, it should be to do those things. Often, the states we live in or the places near us may very well have a similar mystique, yet often go overlooked. There are competing concepts here. The Sacred, the Mundane, and the Profane. A sacred space is a space of ritual and sanctity. It is reserved for only the most holy of holy men, or is closed to the public except on special days. A mundane space is a worldly space that is common and open to all. We often view those things which are near and readily accessible as mundane, we see them all the time, and so they must be. And we often view those spaces that are far away or hard to access as sacred in some manner, consider the sage who journeys for 1,000 miles to make pilgrimage. To the pilgrim at the end of the march it must be painful to contemplate that people live just next door to his Mecca. Yet, there is most likely a Mecca for something that is next door to the pilgrim’s house, yet he has never thought to visit. The mere act of a pilgrimage is a sacred act. To go on pilgrimage to somewhere so close might be seen as profaning the sacred act of pilgrimage. This is the mindset of the average traveler. They view vacation and travel as a sacred act, and so do not wish to profane it by doing so in a mundane space.
How many times have you heard a story of someone living in New York City and never going to the Statue of Liberty or Broadway? In my mind, all spaces are sacred, and we should spend time to discover such spaces in our immediate vicinity just as much as we attempt to find such spaces on the other side of the world.
People have such disdain for the familiar. Too many would spend $4,000 just to eat a Big Mac in Tokyo. This giveaway is for either free subscribers, or paid subscribers. Leave a comment telling me about something within a 6 hour drive/train of where you live that is a great spot to visit. I will be giving a 1 year subscription to whichever one I find the most compelling.
2. Economic Calendar
Refer to Economic Calendar Settings Post for filter settings used.
This is what looks like a busy week on the outset, but in reality there are only two events of interest this week. The US FOMC Interest rate decision, and the Bank of England’s interest rate decision. I am once again ignoring Japan, because their schedule is untradeable. We will review the outcome of their meeting at the end of this week, but I will make no predictions for it.
3. US FOMC Interest Rates
So this meeting is the big one. I am typing this up only about an hour before the meeting, and I suspect that by the time you read this the meeting will have passed. The narrative leading up to this meeting is something I have covered in quite a few posts leading here, so we will review the narrative, and I will explain why I expect they will raise rates 0.25% here and then we will never see another rate hike this year or any time soon.
So, the narrative has been one of economic recovery out of CovID (bullshit) and of a careful end to QE (bullshit), and now a federal reserve that is concerned with inflation (bullshit) who is concerned with an overheating economy (bullshit). The moves they have telegraphed for everyone was for the taper to end in May, which was then accelerated to end in March (specifically, yesterday).
I had to run out and drop off the rental car, and didn’t get back until after they raised the interest rate. Instead we are going to talk about what I was expecting, why, and how it matches with what happened in 2015, and my expectation for a compressed cycle that will ultimately be distressed by a collapse in the treasury markets.
So, with that being said, lets jump back to 2015.
This is a chart of the effective federal funds overnight rate. This is the rate at which money is lent in the shortest term by the Federal Reserve to large banks. It is typically the lowest interest rate available in the US, and is the rate that we are talking about when we discuss the Federal Reserve changing interest rates. In December 2015 I bought my first ounce of gold, and my first 20 ounces of silver after hearing that Janet Yellen had raised interest rates as the Federal Reserve Chair of Obama’s administration.
My first Silver purchase, also, there’s a funny story behind the shirt, I won’t tell it here.
If you have the time, you can read the full transcript of that meeting here. I’ll save you some time, most of the transcript was complete bullshit at the time. What needed to happen then was the Federal Reserve needed to sell the treasury assets from their balance sheet back into the markets first, which the federal reserve had not done yet, and did not attempt to start doing until 2019, and of course the treasury markets collapsed in September 2019 from the pressure. In order for the Fed to raise rates without disrupting the treasury departments ability to pay for the governments deficit, the Fed has to offload their balance sheet first, and then once they are nearly complete can they raise rates. Otherwise the secondary treasury market will be flooded with treasuries, and interest rates will rise beyond the treasury’s ability to pay.
Janet Yellen’s decision to raise rates just the 1 time in 2015 at the end of Obama’s presidency while failing to pay off the balance sheet guaranteed a later failure in the treasury markets. Back then, the markets didn’t quite know what the Federal Reserve was going to do. I’m going to show you two charts, the first is the yield on the 3 year treasury note after Janet Yellen’s 2015 decision, the 2nd is a live chart of the 3 year treasury note right now at the end of the Powell’s press conference.
The above chart is essentially what you want to see from a government note from the perspective of the treasury department that is tasked with paying the debt, which at the time was around $18.7 trillion. You want mostly flat interest rates. You’ll note that the 3 year treasury back then was averaging about 0.6% to 1.1% interest at the time of the rate hike. The market for US treasuries back then was essentially un-reactive. The Fed could do almost anything it wanted to, and the treasury markets were basically static. There was consistent world-wide demand for US treasuries as many entities needed them to function as US dollar reserves for them to buy oil and other commodities from the global markets that were priced in dollars at the time.
That isn’t the case this time, and I want to direct your attention to a live chart.
This is the exact opposite of the kind of chart the treasury wants to see. We have rates that went up to over 2.1% on the secondary market while the Federal Funds rate is far below this. I am going to show you one last chart and will provide my conclusions.
In general, there is a fairly standard trend, treasury yields are typically above the overnight federal funds rate, for a few reasons, the main one is that the treasury yields are typically going to lead the overnight rate but will never be too far distanced from the overnight rate. However, looking at the above chart it becomes clear that treasury yields seem to be moving with no connection to the overnight rate at all. I would argue that the Fed has lost control of treasury yields. This is not yet obvious to the wider financial markets, but most trends are only obvious in hindsight.
The reason I share these charts is because a particular narrative will emerge soon. In 2015, the rate hike symbolized an attempt to normalize the markets after 7 years of 0.25% interest rates. That was the first time US traders had experienced such, but now its been almost 13 years of this, the average traders and fund manager simply has never experienced anything else. The markets know and expect what the Federal Reserve did last time, in fact its the only market most traders know. Retail traders bailed out of treasuries much faster this time around. At the institutional level, and at the international governmental level demand has dried up there as well. Its combining for a massive push up of treasury yields across the board. To be clear, the following factors are all combining to pressure the treasury significantly.
Retail traders exiting treasury bond markets
Federal Reserve stopped buying treasuries on the secondary market (March 15th)
Foreign governments selling US treasury holdings
International trade in US dollars falling, decreasing foreign FX holdings
Treasury selling ~$4T of treasuries for annual deficit
Existing $30T debt has to be rolled back into treasuries as they expire
Interest paid on treasuries has to be covered with sale of additional treasuries
Essentially all of those factors combine to push yields higher, and regardless of what the Federal Reserve does to the overnight rate, yields will have to go up higher. The only thing that can stop this cascade failure of interest rates is for the Federal Reserve to push the overnight rate back to 0.25% and to turn QE back on for however much the treasury needs to cover the inevitable deficit.
At the beginning of this section, I stated there would be one rate hike and no more. Why? Well that comes down to some basic strategy. If the Fed skipped this meeting and didn’t raise rates, then they would have the markets perpetually spooked and it would take several meetings of rate hikes before the markets were convinced. Essentially their would be even more fear-selling in the treasury markets on top of the existing lack of buyers. At the very least, this rate hike might confuse those that otherwise might have some existing conviction that the Fed can’t realistically raise rates.
A return to QE is inevitable, but if the Fed can hold off on doing so for as long as possible they can pull as much money from the markets to fund the treasury before the money printer has to turn back on. What we will be watching now are the primary treasury auctions for the inevitable stress that will be emerging. I will be covering this months primary auctions this week to see how they have advanced since last month. Because the return to QE is inevitable, I do not expect to see another rate hike this year as I expect the pressure on the treasury to be excessive by the next meeting. The treasury rates are disconnected fully from the Federal Funds Rate at this point, the only impact it has is a narrative impact on buyers in the treasury markets. To extract as much money from the markets as possible, the narrative has to hold. And the saying in markets that applies today is this one, nothing matters until it matters. Today, the mathematical reality doesn’t matter, yet it likely will come to matter very quickly. In 2015 it took years before that came to matter. This time it will take months.
As a further note, in the FOMC’s statement, they removed the commencement date when they will start shrinking the balance sheet. Previously they had stated they would begin selling treasuries in February as the start date for Quantitative Tightening. They removed the language about quantitative tightening from their statement entirely. This of course means they missed their February start date, and may no longer have any plans to sell the assets they bought with printed money back into the markets. It’s an ominous sign of the level of market failure the Fed expects to see in the treasury market and Mortgage backed Securities market.
4. Bank of England Interest Rates
As I have been covering over the past few months, the Bank of England is on a course to normalize interest rates aggressively. In contrast to the US Federal Reserve, the Bank of England has the means to make this a reality and they have been hiking rates every single meeting since they finally decided. I’ve covered that trend previously (section 4) along with our ongoing trade in GBPUSD to ride the trend of divergence. As stated previously:
If you are trading intra-week, I suspect the shorter term bull structure to be over. If you are holding for the swing, the bull trade is still on, there is just going to be some additional drawdown in the short term
We are now seeing some draw-down in the position as USD is strengthening into its own failure. I believe it is a given that the Bank of England will raise rates here, and I suspect that we will see the GBPUSD pair return to 1.3072 heading into the decision and next month for a completion of a railroad pattern a double bottom will emerge at 1.3015 for the final long swing entry as the carry trade should continue to escalate as the BoE continues to raise rates.
In the short term I expect to see this pair mostly sideways at these levels with the presentation for additional entries at the levels provided in the paragraph above. Depending on how and when the treasury issue shakes out here in the US, will determine how long prices stay at these levels, however the carry trade should continue to emerge here, especially when the US is forced to turn the printers back on to fund the deficit spending.
I also did not finish this segment before the BoE’s interest rate decision, as covered previously the expectation has been for the BoE to hike rates at every single meeting and this one was not a surprise, with another 0.25% rate hike. As a reminder, this is the schedule they set forth last year, and they are still behind.
Three more rate hikes are necessary this year in order for them to reach their goal of 1.25% overnight lending rate, and the upcoming rate hikes are the ones that would be in question if any are to be skipped. In the beginning, the tone from thee BoE has been one that outlined the rate hikes as necessary no matter what sort of hardship was going on. I agree. I suspect the Bank of England also agrees, but I want you to take a peek at this CNBC article. CNBC is one of those outlets that is often paid to make articles with a specific tone and to avoid articles covering subjects or topics that interested parties do not want run. Notice the headline states that the bank took a dovish tone, but the body of the article has no quotes from the Bank of England, and instead has quotes from BlackRock and another investment firm who are making dovish statements. You can already guess who is probably interested in seeing the Bank of England reverse course on this move. When governments print money, large banks have a very easy path to profit. They simply buy treasuries in the primary auctions and turn around and sell them for profit to the central bank a few weeks later for freshly printed money. It’s guaranteed money. It’s criminal money.
Compare CNBC’s article to this one from Sky News. Some paraphrasing of the bank was done, but in general you get a decent picture of their outlook as well as the results of their vote to increase rates (8-1, nearly unanimous). Of note, they are extremely concerned about inflation, and this is the only tool central banks have to fight inflation, raising interest rates. Thats it. This is what CNBC is not telling its audience. BlackRock and other investment firms benefit significantly from inflation. They can under-perform in an inflationary environment and their investors likely won’t know. Basic holdings can significantly appreciate in value despite not being actually solid investments. In general, everyone at these large institutions makes a lot of money in an inflationary environment where the currency is losing value, of course they would advocate for that kind of narrative to be spread by CNBC, regardless of what the real story is.
In my opinion. The upcoming BoE meetings will likely see continued rate hikes, although I suspect they will probably skip 1 or 2 this year while still meeting their goal a few months late. Ultimately if they are serious about combating inflation, they have to strengthen their currency, and there is only one way to do that, regardless of what anyone else says.
5. Geo-Political Escalation
The war between Russia and Ukraine is currently raging on. For the time being, the West, and China have managed to stay out of the conflict. Sanctions have escalated further from the west, as I predicted from February 22nd, and as is becoming increasingly evident, there is a shortage of basic and intermediate goods in the west. Food, energy, and base metal prices will continue to rise so long as Russia and the BRICS nations are further incentivized to do business outside of the US Dollar and to no longer trade these goods with the west. A worst case scenario in my mind is one where the BRICS nations create their own financial sphere that is completely and wholly separate from the West. Not only would this create a significant hit to the demand for the US dollar, but it would also increase marginal prices of food, energy, and base metal prices as supply would be significantly constrained.
Its easy to think that a Ukraine confrontation (or Taiwan) will only have a minor or short term impact on global finances, but the reality is that the long term consequences of this conflict will be especially hard on the US. We are pushing Russia, China, and other countries to move away from the SWIFT system in order to become more anti-fragile and away from western influence. As I previously covered, this isn’t new information to any of these countries and they have spent the last 10+ years creating parallel systems to avoid SWIFT, now they’re just implementing those systems.
So what has happened in the past 10 days? A deal that has been in the works for quite some time between Saudi Aramco, China, and Russia was made public where China has authorized Saudi Aramco to build and run a refinery in Northern China that will be supplied by Russian oil. It’s expected to commence operations in 2024, it will most definitely be settled on Chinese CIPS in Chinese Yuan. Some rumblings have come out about Saudi Arabia considering abandoning the petro-dollar. This is both true and false depending on how it’s being framed. No, Saudi Arabia is not going to abandon selling oil in the US dollar. Yes, Saudi Arabia is very likely going to begin settling some transactions in other currencies. The share of their sales that settle in dollars will very likely be cut in half or further. Our Saudi allies are likely slowly walking away from us, just like anything else in this world, it will not happen immediately, but instead slowly… in fact it has been happening for the past 6 years, and will continue. One day they might be down to settling only 15-20% of sales in US dollars, that’s not today, but it is around the corner.
On the Chinese side of things, the US navy has just completed a training exercise in the South China Sea with Australia. These sorts of joint training exercises happen all of the time, but typically go ignored by the general public in peace time. Events like this during times of tension both do and don’t matter. They don’t matter in the sense that they are just business as usual, they do matter in the sense that they up the chance of a mistake or escalation occurring. As usual, nothing happened just yet, and my expectation for China’s move on Taiwan is that they would prefer not to move until we get further entangled with Ukraine and Russia. China does not want to be the first country to engage with us, they would prefer that we are distracted. Will they get their distraction? Maybe, it’s hard to tell. I suspect China would prefer for continued economic attrition of the West. They didn’t cancel fertilizer exports last year and stock up on food and grain storages for nothing.
The affects of Chinas power woes on the west will also be significant. Prices for all metals are likely to spike significantly, as well as fertilizer prices for the 2022 growing season. Quite possibly we may begin to experience even more significant shortages in metals, building materials, copper wire, etc. This may contribute to significantly rising food prices next year (above the current price rises) as chinas elevated cost of energy and production now echoes through the thousands of finished goods that are dependent on these inputs. Buy things in bulk where you can. We have several more years to go. - October 2021
Consider that I am not omniscient, and do not know what the Chinese government may have been preparing for. Consider also that conflict with Taiwan may not have been what they were preparing for. Could they have been preparing to completely sever themselves from SWIFT in the midst of a famine and then dangle the sale of food in front of other countries as a carrot to get them to leave SWIFT and join CIPS? I don’t know. They could be intending anything. My posts above from October and December were ahead of Russian fertilizer being blocked from SWIFT, and were prior to any real hint of conflict in the mainstream. How might those actions above be considered in the light of what we know now? As always, I suggest that we humble ourselves and remember that geo-political actors always have the capacity to surprise us, and it could very well be that China has something planned that we have not stopped to consider just yet.
6. Conclusion
A few notes. I did not return in time to start this article over the weekend, so it dragged into the week as I got home Tuesday night (3/15). There was no crypto macro update attached to this week, because that will be its own separate post. The march treasury bond auctions have completed, and that will also be its own separate post this week. There will be no review of this weeks events because, lol, well it’s thursday already and I have included conclusions for both major events this week as they passed before I could finish writing the article. Instead either the crypto macro post, or Treasury bond update will come out this weekend, leaning towards the treasury bond update as it is more relevant, and we had another bloody auction and I am eager to see what volume of bids showed up. Remember that this month was the last month that anyone buying in the primary auctions was able to sell treasuries to the federal reserve on the secondary markets. Next months auctions will probably be some of the worst we’ve ever seen.
My conclusions from this week have mainly been that here in the US we will see a compressed cycle where the Fed is forced to return to the money printer much faster than they were in the 2015-2019 cycle. For now, expect prices of assets to continue flat or down, while consumer inflation continues to run rampant. Watching GBPUSD we can continue to expect the carry trade to continue to develop with additional swing entries presenting themselves over the next 1-2 months ahead of the May BoE interest rate decision. We are still watching for the US treasury market to continue to destabilize and we will discuss the March auction results in the next few days. I hope you are all well and remember to vacation both near and far. Often heaven is just around the corner, but man busies himself with mirrors and telescopes so that he might peer into the stars. Don’t forget to look for heaven at home.
I have travelled the east coast of Australia both with my parents and then as an adult. Car, train, plane and then by motorbike:) Where I'm situated, you typically have to travel north to the tropics to see rainforest and waterfalls...or so I thought. A random 'hey, let's go for a drive' on a Saturday led us to the most gorgeous set of waterfalls only an hour away...and right next to the freakin highway! The sound of the waterfalls dims the highway noises. We sat on the rocks in the hot sun with our feet dangling in the water and marvelled at little we knew about our own backyard.
I was raised in NYC and my favorite museum of all is the Natural History Museum. That being said, in Washington D.C is the best museum in my opinion, the Post Office Museum. I think most people don't go to it because they assume "what history can be learned through letters and packages." However that makes for a sparsely populated museum in a building grandiose and occupied by some of the coolest displays and facts I've seen. You can even bring children and let them play the game of tossing boxes into bags like a mock carnival game. It's full of amazing history especially that of mail and how it was delivered in the western frontier. Best of all, If you're knowledgeable of Lysander Spooner and his qualms with usps then you can begin to take away the bias in some of the "historical facts" and get a sense of just how amazing it must've been to have delivered mail in a developing america.