A macro view was discussed to close out NFTRH 912 as FOMC week begins…
Excerpted from the latest edition of Notes From the Rabbit Hole:
Fears about “inflation” the war-driven rise in prices of certain commodities and their knock-on effects have bounced Treasury yields a bit. The 10-2 yield curve has flattened under this pressure as the market weighs whether or not this will manifest in a more hawkish Fed.
Interestingly, CME Group traders now hold a majority view of the Fed holding rates steady into June, 2027! I’ll believe that when I see it. Especially since we’ve come to view CME as little more than a wind sock for the direction the wind is blowing at any given time. Regardless, the bond market – through its most important feature, the yield curve – implies a firm Fed, Warsh or no Warsh.
The NFTRH view is that team Trump/Bessent/Warsh * is going to find a way to stimulate the markets into the mid-term elections. If that view proves correct, it does not have to come through public facing Fed Funds Rate policy. There is this thing called QE, which is early in its progression (see below), along with its close relative, Modern Monetary Theory (MMT) or more accurately in my opinion, Total Market Manipulation (TMM).
Now let’s delve back into the economy and its manipulated motor. Economists call the rising GDP as measured in officially calculated inflation terms “real GDP”. It’s doing quite well.
Nominal GDP is obviously also rising even better over the very long-term. Conventional economists and market managers love these pictures, and swear by them. Gold bugs? Not so much.
Because even assuming the inflation figures are real, GDP is only “real” if you believe that debt can continually be expanded in service to propping GDP. If GDP is rising, the debt required to sustain it is rising even better. Fact.
Circling back to the point made above, while it certainly is possible, if not likely that CME is wrong again in its forward Fed Funds Rate projections, even assuming the view of rates being held firm for the next year is correct, the Fed can expand its balance sheet to support the economy and markets once again.
Indeed, they have already stated their intention to do so, and you can see total assets basing in preparation for a rise.
The percent change from a year ago makes it even clearer. We are on the verge of a stimulative phase.
While history has taught us not to fight the Fed, and indeed I don’t plan to, managing the situation is not as simple as doing what market lemmings did for decades prior to the 2022 rupture of the long-term downtrend in the 30yr yield “Continuum”.
I realize I am not covering new ground where NFTRH is concerned. But it bears review and repeating for myself, if not for you. The message of all of the above inputs is profound.
In my opinion, in the near-term the Fed is going to operate more or less as it had for decades into the end of the secular bull market in bonds in March, 2020 (which was confirmed with 2022’s long-term breakout in yields). I also believe that a vast majority of investors, especially money managers and financial advisers, will also operate under the old rules. Lemmings be lemmings, after all.
While a more broadly bullish back half of 2026 is anticipated, beyond that the new macro, featuring a secular rebellion in bonds, will favor real (hard) assets, real productive entities and resource-rich markets. Capital will have to go somewhere. But I expect it to flee debt leverage within markets overly financialized by decades of a now-defunct macro and its associated debt shenanigans.
* Again, I expect Warsh to have a little Bessent on his shoulder, whispering in his ear just as I believe “too late” Powell had a little Yellen whispering sweet “transitory” nothings in his ear when he should have been fighting inflation back in 2021.
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