A review of the week with a focus on the Fed and the Treasury as they row in different directions.

Pinecone Macro Research aims to provide unique, well researched analysis of the global markets using a macro framework. Find us here: www.pineconemacro.com

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All right.

2

Welcome back to another

edition of Daily Discernments.

3

And as I warned, it's gonna

be very much almost daily.

4

this is more of a week that was.

5

there was a lot to talk about this

week, but I was trying to kinda take a

6

step back and think about these things

a little deeper before I recorded.

7

obviously I have the Daily Dots that I

do, you know, very much closer to daily.

8

and then my Twitter feed, which I feel

like is kinda thinking fast, and I, I

9

kinda want this to be thinking slow.

10

So I didn't wanna overreact to the

Treasury stuff and talk too much

11

about it on here earlier this week,

especially given that we obviously

12

had Jackson Hole coming up Friday.

13

So instead of throwing some videos

at you with my initial thoughts on

14

that stuff kind of throughout the

early week, I decided, nah, I'll just

15

do it at the end of the week when

I can kind of look at it from afar,

16

you know, a, a, a little better.

17

so I'll kinda catch you up on my

thoughts on really on Fed and Treasury

18

at the end of the day because y-

there's a lot of other stuff going

19

on, but that was the, that was, that

was really the headline for the week.

20

At the end of the day, I think the

Treasury Secretary bit off more than

21

he meant to chew by going all the way

to, you know, we'll use the TGA to

22

backstop, you know, capping yields here.

23

I think he just wanted to get

yields down, you know, ten,

24

20 bips just to cool it off.

25

which, you know, so far has

been perhaps kind of effective.

26

at least, you know, we're basically

where we, where we are when we

27

started this whole thing, but at

least you're not higher, I guess.

28

but to say we're gonna throw the TGA

at it, and to have, you know, Druck

29

have a, drop an op-ed criticizing,

criticizing, you know, this emergency

30

policy stance despite no emergency,

I, I just feel like he did more

31

than he should have done there.

32

And I, I think if you gave him the

opportunity to go back in time and ask

33

him if you wanna, if you wanna tell the

world you're gonna throw the TGA at,

34

you know, dramatically reducing the,

the weighted average maturity of, of

35

the national debt, because, you know,

the-- you don't like the market price.

36

Is like, is that something

you would like to do?

37

I think he would be like, "No.

38

Like, I just wanted to say we will bump

up these buybacks You know, enough to

39

just cool off yields for a little bit.

40

but that's why you should never

put yourself into a, a situation

41

where you have to, you have to

keep re-escalating with the market.

42

Either you're willing to do all those

escalations or you just shouldn't touch

43

it, especially with the bond market.

44

Like this isn't, as I've stated before,

like this isn't oil, this isn't, this

45

isn't some of these other markets that

are smaller or maybe mostly levered

46

players and futures like this is real

money with, with real interests and, and,

47

and this stuff, and it's the kinda global

benchmark for, for credit, for risk.

48

Like it-- this is a different game, and

I think he lost sight of the fact that

49

that was a different game, along the way.

50

Now, you know, if we get yields busting

out to, to new highs next week, then we

51

get to find out like how serious is he?

52

How much, how much balance sheet is

he willing to throw at this thing?

53

we'll just have to see.

54

As far as, you know, the Fed, my view

was because Bessent had fumbled this, he

55

really needed the Fed to come out and,

and make it clear somehow that they,

56

they actually still care about inflation.

57

Because so far, you know, Warshaw's

talked a good game while also

58

saying he didn't wanna do anything

'cause, you know, he could just let,

59

he could let rates do it for him.

60

But as soon as Bessent said, "We're

not gonna let rates do anything for

61

you," to me, he kinda had to pivot

back to like, "Oh yeah, the policy

62

rate's actually pretty important."

63

And I th- I thought he did

that today at Jackson Hole.

64

Like, you know, he used the word hike a

few times talking about physically hiking,

65

but I, I personally took that as a signal.

66

Now, you could argue he was

trying to, he was trying to move

67

around the algos by throwing the,

the word in there a few times.

68

Maybe that's true, but, I thought he

put a lot on the line to, to add some

69

credibility back to the Fed after I think

he, a- at least on some level, put it,

70

you know, at risk a little bit, I would

say, with the, with the July meeting.

71

but they're at odds.

72

I mean, if he's going to, you know,

if he, if he wants long-term yields

73

to help him tighten, but the Treasury

doesn't want yong- long-term yields

74

to go up anymore, like that's at odds.

75

Like, you can't have

both, so they gotta pick.

76

So Bessent needs to either stop

talking about yields, or he needs

77

to not, not do more than the,

the liquidity program buybacks.

78

Like if they do activist buybacks, that's,

that's different, and then the Fed has to

79

kinda mop that up with the policy rate.

80

Or you just make it clear that nobody in

DC cares about inflation, not the Fed,

81

not the Oval Office, not the Treasury.

82

And if none of them care, I don't…

83

I'm not sure Congress even

knows what inflation is anymore.

84

So, like, it just makes it clear

there's no adults in the room.

85

No one cares about inflation.

86

They're gonna truly let it run hot.

87

And that's when you, that's when

you can lose expectations, because

88

expectations expect you as a

policymaker to do something about it.

89

And for now, you know, that's,

that's what the market expects,

90

policymakers to do something about it.

91

And again, he-- I, I do think

he took a step in the right

92

direction on that stuff today.

93

So I think you had a significant

communication error by, by Scott

94

Bessent and the Treasury, because

to be fair to him, he's not the

95

one that said the TGA thing.

96

That was like a CNBC thing that

came from some unnamed officials.

97

But, I wanted to highlight a few things

that, Warsh said today with s- just

98

with some thoughts on them, because I

think some of the stuff's important.

99

he said, "The Fed needs clear market

signals as unfiltered as possible

100

from market internals, the level and

change of asset price, prices across

101

sectors, the prices and trading volumes

of Treasury securities, the foreign

102

exchange value of the dollar, the cost

and availability of credit, and the

103

price of a broad set of commodities.

104

These and other indicators should

inform the Fed's near-term outlook,

105

on economic activity and inflation

throughout the business cycle.

106

They should also reveal the state of

broader financial conditions and the risks

107

of uncertainties in the financial sector."

108

Totally.

109

But that's, that's the

whole point on Bessent.

110

If Bessent's gonna get in there

and, you know, throw a stick in the

111

spokes of the treasury market, you're

not gonna get a clear read on those

112

prices and those trading volumes and

what, what the markets think about,

113

you know, the economy and the data.

114

Like, it messes all that up.

115

Not to mention the value of the dollar

because that, that's a part of it.

116

Obviously, the cost and availability

of credit gets messed with if

117

the Fed's going to cap yields.

118

so it's just interesting to

read, read that in light of

119

what just happened, obviously.

120

He went on and said, "The

economic literature has long

121

described the distorting effects,

a hall of mirrors problem.

122

If markets rely materially on the Fed's

guidance and the Fed relies on market

123

prices, we're all, all more likely

to be blinded to new developments,

124

more likely to be caught unprepared

for a turn of events, and more likely

125

to commit errors in policymaking."

126

Of course, but if Scott Bessent's

gonna hold up a giant mirror

127

in the hall of mirrors, I don't

understand how that helps.

128

But again, hey, maybe this is why,

you know, there was a little bit

129

of a war, if you think that it

was legit coming from Druck in,

130

in that Wall Street Journal op-ed.

131

he said-- he went on later to say,

"There should be no misunderstandings.

132

The Fed's price stability objective is

two percent, as measured by the PCE.

133

It's a firm fixed target.

134

Let's be equally clear about

another aspect of the objective.

135

Price stability is not self-executing, nor

is inflation necessarily mean-reverting.

136

It's the Fed's job to

deliver stable prices."

137

I mean, I could not agree with that more.

138

Now, it's important to remember last,

in Ju- in July, he went kind of, kind

139

of far out of his way to make it clear

he, he wanted to move away from PCE.

140

So him, like, kinda stapling PCE to

your forehead here and, and kinda

141

re-underwriting it, it was important.

142

He, he threw it under the bus, and

I think the market didn't appreciate

143

that, nor should it have, in my opinion.

144

So the fact that he, like, kind

of re-underwrite it-- wrote it

145

here to be like, "All right.

146

Yes, maybe we'll change that later,

but for now, like, I-- yes, two

147

percent PCE, that's the thing.

148

and it's totally our job to deliver that."

149

Great.

150

But you've had two meetings

and you haven't raised rates.

151

Now you're talking hawkish for

the, basically the third time.

152

Are you gonna raise rates in September?

153

And if not, then the market's gonna stop

listening to your tough talk, right?

154

I thought that was forcefully hawkish

that he would go out of his way

155

to, to, to say that, personally.

156

But, you know 2.0%

157

is the, is the target on PCE.

158

It's running at three point seven.

159

six-- I think six-month

annualizes even higher than that.

160

So why aren't you hiking?

161

Like, what are we talking about?

162

Like…

163

So again, you, you could

talk hawkish all day.

164

You can, you can talk about hikes,

but if you're not gonna actually

165

hike, then the market's really

gonna start having problems.

166

He said short-term interest

rates are the predominant tool

167

to achieve the dual mandate.

168

Unconventional policies to spur

economic activity may suit genuine

169

crises, but should otherwise

be used sparingly, if at all.

170

To be very clear, the Treasury's

buyback policy, if they start

171

doing that past liquidity, and

to do it as a price control, is

172

obviously unconventional policy.

173

It would be used if it's

currently not in a genuine crisis.

174

that's obviously not sparingly.

175

Like, if you got four percent inflation,

four percent unemployment, four percent

176

growth, and you're doing unconventional

policy to spur economic, economic activity

177

or to get rates down or both, I mean,

that could not fly any harder in the face

178

of exactly what Warshaw's saying here.

179

So to me, it's another shot across

the bow at, at what's going on, you

180

know, at Treasury, but we'll see.

181

He went on to say money matters, which I,

this whole passage I agree with in full.

182

I just wanna make that clear.

183

It's not fashionable these days, but

my view is that money has something

184

important to do with monetary policy.

185

We should pay attention to money created

by the central bank and money that comes

186

from the banking and financial systems,

I would argue also from deficits.

187

it's true the financial innovations and

other factors alter the mechanics that

188

link the monetary base, the velocity

of money, and the broader economy.

189

But that is scarcely a reason to

ignore the ultimate effects of money

190

on financial conditions and prices.

191

I really couldn't agree more.

192

Like, the Fed just threw away

caring about money supply, years

193

ago, and I think it's getting

import-- it's, it's important again.

194

I, I think COVID showed that, that whole

era where, you know, the money supply

195

took off, no one cared, it was transitory.

196

Next thing you knew, you had

huge inflation, like duh.

197

But the, the problem here for Warsh is

like you have money, money supply growing

198

like kinda six to eight percent right now.

199

So that's pretty, that's

pretty dang inflationary.

200

So again, to use your own metrics

here, money supply is becoming

201

its own problem, and it sounds

like Treasury would really like to

202

goose lending from, from the banks.

203

that'd be a giant money supply problem.

204

Obviously, the, the budget deficit is a

giant money supply problem on its own.

205

So if you get both kind of running at, you

know, close to full strength or, or above

206

even, if you kinda think about it, money

supply would be a huge inflationary issue.

207

So again, don't talk about it if you're

not willing to do something about it.

208

and I, I'll go back to say him, him

like highlighting, hey, the policy

209

rate is, is the most important thing.

210

That's important because the…

211

in July, he kinda made it sound with

his non-answers like maybe he didn't

212

view the policy rate as the thing.

213

It was like, "Oh, it's fine because

we can just use like long end yields

214

to help us out," or, you know,

"Maybe we use the balance sheet.

215

You know, we'll, we'll reduce

the balance sheet, and that'll

216

fight inflation for us."

217

Like, it seemed like he was

focused on non-policy rate stuff.

218

So the fact that in this, in this

speech at least, he kind of, you know,

219

really stamped how important the policy

rate is, and that was the main thing.

220

That was important because again,

that, that puts all this emphasis

221

on, okay, well then you better use

the policy rate since inflation's

222

running almost twice your target.

223

and in my opinion, not gonna

get any better anytime soon.

224

he went on to say later that

credit and loan markets are showing

225

few signs of policy restraint.

226

That was important.

227

So if you're telling me that,

that, you know, money and credit

228

show-- don't show restraint, then,

then you're telling me that the

229

policy rate is too low, obviously.

230

So again, do something about it.

231

Stop having, stop having

meetings where you don't hike.

232

he said the jobless rate at four point

one percent was by historical standards

233

has not changed, much for a couple years.

234

Unemployment claims on a four-week

average, empirically robust

235

real-time indicator are near

their lowest level in decades.

236

So he, he basically went out of his way

to say, "Yeah, you're at full employment."

237

So again, sounds like another

reason to, to, to hike, right?

238

You got inflation running hot,

and you're at full employment.

239

I don't…

240

It's kind of obvious what

you're supposed to do there.

241

He was talking about inflation.

242

He said, "We, we also want to

understand not just the direction

243

of travel, but also at the speed.

244

Each of these broad inflation measures

has fallen significantly from their

245

twenty twenty-two heights, but progress

over the past two years has been modest."

246

That annoyed me 'cause there has been

no progress over the last two years.

247

Inflation today is higher by a pretty

good margin than it was two years ago.

248

So there's been less than modest,

progress because there's been no progress.

249

you-- two years ago, PCE was two point

five nine, now it's three point seven.

250

Like, stop.

251

he said, "To try and gauge

underlying inflation, I find

252

it instructive to disaggregate

the one hundred and ninety-nine

253

individual components of the PCE.

254

Over the last twelve months,

fifty-four percent of goods and

255

services in the PCE basket show

price increases above three percent.

256

This is well below the pre-pandemic

highs or the post-pandemic highs of

257

seventy-seven percent, but it's well above

the level of thirty-two percent in the

258

last twenty years before the pandemic."

259

I, I totally agree with him here.

260

Like, that's a-- it's a great

way of, of measuring inflation

261

on a kinda thumb in the air way.

262

Like, okay, just how much stuff is

like high and how much of it isn't?

263

And whenever, you know, more than

half of the stuff you measure is above

264

three percent, you're probably not

doing great on your two percent target.

265

I don't, you know, that's

pretty obvious, but I like the

266

simplicity of, of that measure.

267

Now, obviously, you combine that

with all the other measures and

268

to get that holistic picture, but

again, that screams hike, man.

269

Like, so stop talking

about it and be about it.

270

the last one I'll read from, from

his speech today, said, "It matters

271

too whether the inflation readings

of the post-- past five years

272

have seeped into expectations.

273

The good news is that measures of

inflation expectations in the medium term,

274

by and large, look stable, and inflation

compensation measures from the swaps

275

market send a strong and similar message."

276

One hundred percent.

277

Like, I don't-- the inflationists

out there, like and I am one, big

278

time, have to admit, like inflation

expectations are largely fine.

279

Like, it's not scary.

280

It's not bad.

281

You know, sometimes when some of

us get carried away about how bad

282

inflation is about to be, that may be

true, but it's not in expectations.

283

and I think that gives the Fed some,

some, you know, some leeway to play

284

this a little slower than I would like

to see from a pure policy standpoint.

285

but what I will say is if he didn't

come out hawkish today, he stayed

286

dovish, they didn't hike for the

next few months, and inflation was

287

running above four, that-that's

where the expectations come in.

288

Like, if you show that you're not

willing to, to fight inflation, the

289

Treasury doesn't care, the Oval Office

doesn't care, Congress doesn't care,

290

that's when all of a sudden the market

has to really do all the caring.

291

and if you start holding yields down

while running it hot While inflation

292

is above four, like, that would

be, like, the, the regime I think,

293

especially after you've been well

above target for five, six years.

294

Like, that would be the regime where

the expectations could just blow out.

295

And that's one of those deals where

once, once those, you know, expectations

296

jump the fence, it's, it's very hard to

catch them and put them back in the pen.

297

So you just can't let them get out.

298

and he paid good lip

service to that today.

299

But again, you know, if you keep

talking tough and not hiking, eventually

300

the market is going to, you know,

understand what you're doing, like,

301

pick up on the game you're playing.

302

that was it for me for, like, as

far as the Fed Treasury stuff.

303

I think Bessent stepped in

it, but it, you know, it, it

304

doesn't mean he can't kind of…

305

If he just stops talking

about it, it'll go away.

306

And, or if he kind of, like, puts

the toothpaste back in the tube

307

by being, "Look, hey, I'll-- we're

just gonna do the liquidity stuff.

308

I never said we're gonna do

the, you know, TGA, throwing the

309

whole balance sheet at yields.

310

Like, I'm not doing that.

311

I'm just here to manage

liquidity problems.

312

That's it."

313

If he puts the toothpaste back in the

tube on that, then I think you're good.

314

Then, you know, it's not yield

curve control just 'cause he

315

doesn't like the price, like it

really, really looked come Monday.

316

but we'll see.

317

I mean, the ten-year just closed out

at four point seven two on the, on

318

the week, basically at the highs,

up five basis points on the day.

319

And I th-I thought you could get long

in yields down, if he was hawkish, but

320

instead, you, you know, you, you, you

flatten, which is I guess decent, but

321

even the thirty-year yield was up today.

322

I would have guessed it would've been

down five basis points and it was

323

up one, so, shows what I know on,

on that, on that from that angle.

324

But, you know, you had, you had a week

where oil's down, so that, that's,

325

that's very beneficial here short term.

326

so if you get oil up five percent next

week and rates are up another ten,

327

fifteen bips, like, what does he do?

328

And what does he do about the yen?

329

The yen's, like, right back

above one sixty to the dollar.

330

you know, and, and you got rates not that

far away from five percent on the ten.

331

Like, is he willing to just let

it go, or is he really gonna truly

332

throw the balance sheet at, at this

because he doesn't like the price?

333

We're all gonna have to find that one out.

334

you know, for the end of this

week, gold got smacked because

335

at least the Fed shows they care.

336

Totally makes sense.

337

Basically what I half

expected to happen today.

338

but if you come in the next week or

the week after, you know, next couple

339

of months, whatever, however you

wanna look at it, and inflation prints

340

start really blowing out the long end

again, if Bessent comes to the rescue

341

and buys a bunch just to keep yields

down, then you're right back to the,

342

the debasement game being, being on.

343

It's like when the car passes

by and you say, "Game on."

344

That, that's where you'll be.

345

So we'll just have to watch it,

you know, for the next few weeks,

346

see what Bessent really does.

347

For now, you have a Fed chair that

looks hawkish and looks like he

348

actually means that he's going to

hike, in the next meeting or two.

349

I would say the next meeting.

350

but we'll have to see.

351

But that's it for me this week.

352

See y'all probably sometime

next week at some point.

353

cheers.