A lot of the elites are going out to bat for NIRP. Be vigilant & do not let them normalise negative interest rates in the US. If you don’t like inequality where it is today after a decade of ZIRP, think about what happens when NIRP comes to reduce costs of risks entirely.
NIRP is not normal & do not let anyone normalise it. Ever.
We all will pay for it. No such thing as a free lunch. We will enter something in which there is NO EXIT, well, let’s just say that no one has exited, yet, & don’t know how to exit as NIRP is a doom loop. Yep.
Something else. Look for negative interest rates & their consequences beyond the entire bund yield curve going below zero OP EDS. Do you see them in the FT & key financial journals? No. Do you know why?
George Orwell wrote: the REAL news is what is NOT on the news 👌🏻
Will continue this thread when I have more band-width. Will do something similar to my trade-war one pinned above.
This. Does it say anything about ordinary people. The economy? No.
The abstract says: HOW TO ENABLE NIRP.
What is NIRP for: MAINTAINING THE POWER OF MONETARY POLICY to end recessions.
Really. It says that. To maintain the power of monetary policy 👌🏻
That phrase that the zero bound is not the law of nature by the IMF & repeated by some on twitter. Do u know what is the law of nature when mankind doesn't have rules?
Allow me to quote Hobbes on life before the social contract: Life is solitary, poor, nasty, brutish and short👌🏻
The LAW OF NATURE is NO WAY TO CONDUCT MONETARY POLICY and definitely NO WAY TO WRITE A GUIDE ON HOW TO CONDUCT MONETARY POLICY.
This is not sufficient logic. Thread will continue later. Got Asian economics to deal w/ 1st.
Before I go, he summarized his thesis in this sentence for the 89 pages of how to ENABLE NIRP (I didn't say it, author did). Read this: to MAINTAIN THE POWER of monetary policy in the future to end recessions w/in a SHORT time.
ECB started NIRP in 2014. We're 2019. Define SHORT.
Here is food for thought, since NIRP in 2014, the German economy now shrank -0.1% in Q2 2019. Read that thesis again: To MAINTAIN THE POWER of monetary policy in the future to end recessions w/in a SHORT time.
Winter is here & they have burned all the wood 👌🏻👌🏻👌🏻.
A technical recession is 2 consecutive quarters of contraction so let's see if Q3 is better. But let's ask a basic question for those pro NIRPers:
The ECB has been lowering the deposit rate since that fateful June 2014 from -0.1% to now -0.4% & bund deep below zero. So where to?
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Yes, it has been a while. I have been running around the world & Asia. It was nice seeing so many people and places to share views, but my inner nerdling self fundamentally enjoy sitting at desk listening to music to read and analyze. For those that I got a chance to meet, thank you! People make the world go around - we all yearn to understand our reality & seek to be understood.
Anyway, shall we review first half? And perhaps think about second half 2025, which starts Tuesday next week.
First, we live in a Trump world. By that, we can't escape his decisions, pushing, wanting.
What does he want? That is a question I get a lot. And most people tend to response with this, "He probably doesn't know it himself."
I don't agree. He does. He's clear about it. It's how he gets there and the people that he surrounds himself with to execute it is a big if but not what he wants.
I'll put three things that Trump wants and basically got so far despite everyone calling him TACO (Trump always chickens out).
Three things Trump wants:
a) Tariffs - he likes tariffs. He sees it as a tool to get what he wants, which is to grow US industrial prowess & rebalance US trade. We can disagree on whether this is the right tool or subsidies or industrial policies are better. But tariffs he wants and he gets.
People think TACO is the trade. But tariff is the trade. It's higher. You accept this new normal fine.
I'll give you an example. We got 50% on steel. 25% on aluminum. 25% on auto. +25% fentanyl on Mexico and Canada excluding USMCA products. +20% on China.
And +10% on rest of the world. For China, expires August. For rest of the world, 9th July. Probably gonna get extended.
Happy to be back in Hong Kong! The world is on fire, this time, the threat of war widening beyond just Israel and Iran but to the US and that means the gulf.
Meanwhile, Japan sees core inflation rising to 3.7%YoY and this forces the BOJ to hike (it really doesn't want to for many reasons) as it struggles with policy response - note that inflation has been higher than 2% for so long while policy rate is only 0.5%.
So who is most affected by this whole conflict? Well, we all in different ways but the most obvious outcome is oil. Let's take a look.
We Asians IMPORT 69% of oil going through the Straight of Hormuz and the Saudis export the most.
First, let's go through what's happening. Iran has been attacked by Israel and has shown that it is weak. Now that it is weak, it will have to fight back strongly or risk being seen weak.
So it's a question of how it will surrender not whether and when. Will it do that to the US or Israel? It will fight first. Second is the US, will they take this opportunity to wipe out the threat of Iran nuclear power?
If the US is involved, there is a chance of this widening out as US assets in the region will be targets.
Hence the question of the Straight of Hormuz.
20% of global oil consumption flows through the Strait of Hormuz. It is a narrow channel so if that gets choked up, we're looking at a big oil supply shock.
Who's affected? Producers - the gulfs like Saudi, Kawait, UAE.
Who are the importers? Asians, namely China, India, Japan, South Korea. They make up 69% of total imports.
Happy to be back in Asia. Paris was great for many reasons - but mostly because the vibe in Europe is much better as people feel more empowered by change that allows people to zoom out from usual distress over political stalemate, even if challenging.
What do I tell clients? Well, the same as I usually do. When you look at data, don't get fixated on a point in a series. Non-farm payroll/jobs data is an example. Markets get so fixated on what the expectations are & whether results are a beat or not. But what we should look at is a trend over time. Revisions happen. Downward revisions or upward. Seasonality happens (strikes/weather/etc). But what does the trend tell you & what does that mean for policy reaction function?
Well, if you zoom out, then what we see is that job gains are SLOWING in the US. And labor market data is lagging.
The ISM, both manufacturing and services, both point to slowing activity.
Meanwhile, we have CPI coming out in May - markets expect 2.5%YoY from 2.3% in April.
So what? What will le Fed do?
Inflation is an interesting figure. Why? Because it mirrors what Trump's doing on tariffs and also the dollar going lower, which means imports cost more now.
Both tell you that US goods inflation should rise over time. But what does that mean for US CPI? Well, most weights for US CPI is housing/services, which are non-tradeable in nature.
So while US CPI is rising, the Fed will want to see if core PCE is rising. Anyway, if employment is softer over time, and inflation is rising, doesn't that constraint the Fed from seeing through the fog and know what to do?
Trump tariffs. Where are the powers coming from? Well, he has a menu of tariff options. It's the only tax that the president can incur without congress.
For Reciprocal Tariffs, he used the International Emergency Economics Power Act (IEEPA), which has an advantage of SPEED and SCOPE but disadvantage in FOUNDATION or legality.
Why? Well, he declared that the TRADE DEFICIT is the national emergency.
The US Court of International Trade said that he MISUSED the IEEPA, as in the foundation of the "emergency" is not right.
Trump team knew this. They know the laws. They decided for SCOPE and SPEED. What happens next?
Well, they appeal. And eventually, it will be the Supreme Court that will decide. But the foundation of his "emergency" was always being questioned.
Irrespective, for markets, there was already a Trump put, and a clear one. He himself sees these "reciprocal tariffs" as maximalist positions anyway.
Remember that he has other powers to choose from. Section 232 has a STRONGER FOUNDATION but takes a while. You need consultation and etc so it takes time.
The +25% steel & aluminum tariffs for example is from Trump 1.0 and he's just removing exemptions + raising alum from 10% to 25%.
Happy Memorial Day to Americans! And good morning to Asia!
Let's talk about something very topical. Debt. Yes, it has risen. How much debt do we have really? Who owns it? Why is cost of debt an issue?
Can the US solve its debt crisis?
This chart is my fav chart. I show stock of debt & then flow of debt (change since 2019 in orange bubble). Debt matters in terms of who owns it, which sector, etc.
Who is the biggest debt of them all? Well, Japan. It is also the biggest creditor to the world (lending money). Japanese debt is unique in that because of weak private sector, the government has been just expanding like crazy because the households and corporates just sit on savings.
Okay, why is this important? Well, those savings traditionally invested in their own debt (used to be very low yielding on the longer end) and also OTHERS' debt, USA + other emerging markets, also Europeans etc.
The Japanese sovereign yield curve is interesting not just for Japanese lifers, banks & JGB strategists but also for everyone else.
What has happened? Well, per usual they will run fiscal deficit. Nothing new. But the BOJ also owns like 48% of this debt and wants to reduce, but very hard because lifers etc don't want to buy so much more of this supply.
So what happens? The yield curve steepens. What is a yield curve? Well, you can borrow short-term (overnight) or for a long time (30 to 40 year in Japan) at a set rate. Japan has been running very close to zero rate for a long time.
So debt is not an issue if your servicing costs were close to zero.
But the longer, esp the 40-yr is now 3.5%. Yep!
The shorter end, which is policy rate is 0.5%.
US April inflation came over night softer, and that's no surprise really - we knew that energy, food and service costs were going lower. Everyone said, well, what pain for China if April exports were strong, not to the US of course, but to the world (+8.1%)YoY. The same is said about US CPI. It's actually slower to 2.3%YoY despite a very soft USD & tariffs that started since February.
What does that mean? Why did the the US-China both come to the table to stop the embargo of trade?
Can both of these arguments be true? Of course. First, we must talk about these different balance sheets. They are one and the same. But they interact differently.
CPI is a domestic phenomenon. US inequality/lack of affordable housing/high costs of college/healthcare/etc are DOMESTIC IN NATURE. We call it NON-TRADEABLE. Sure, higher steel & timber make building a house more expensive. Higher appliances also make it expensive. But let's be honest here, the biggest costs of the house is the land & next costs is the regulations and the permits and the actual time and capital erecting it.
California/NYC/Seattle where the jobs are all have regulations that make it very expensive to build. And that has been the case during LOW TARIFF REGIME.
So listen, just think if you live anywhere. When you get a paycheck, where does your money go? Well, if you rent or mortgage, then it's HOUSING.
Next, if you live in the US and send your children out of state or private for education, it's not a rounding error on two middle class incomes.
Of course, another essential - FOOD.
Another one is transport - that includes FUEL + Car (and indirect cost is TIME).
Goods, while you know, nice to have, durable goods you buy once and hopefully last you a decade or two, like a washing machine or a fridge or a microwave.
Toys, definitely like you buy according to age and once & don't repeat and prolly can get used because everyone disposes of this once the child is done.
So when you look at US inflation, the largest weights aren't GOODS or IMPORTED goods for a consumer.
It may be a very big part of a producer that imports intermediates. Say an oil driller that needs steel to build infra to drill or a domestic producer of appliances that need parts that are cheaper to source, say China.
Irrespective, an AVERAGE American person isn't going to feel tariffs. They will feel it via the news, via tiktok, via social media, via the financial markets that have exposure to the higher costs, but they are not feeling it much if they don't have a lot of financial assets.
So the reality is that inflation in the US is GOING DOWN for core goods. Egg inflation is lower after a flu supply shock. US food exporters will sell more domestically if selling abroad faces tariffs. But food isn't the bulk of inflation.
It's the services like housing etc. And they are going down.