via creditbubblebulletin:
Somehow, it staged a remarkable comeback. “Transitory” was spoken five times during the post-meeting press conference, twice by Chair Powell: “As I’ve mentioned, it can be the case that it’s appropriate sometimes to look through inflation if it’s going to go away quickly without action by us, if it’s transitory. And that can be the case in the case of tariff inflation. I think that would depend on the tariff inflation moving through fairly quickly and critically, as well on inflation expectations being well-anchored, longer-term inflation expectations being well-anchored.”
We’ll have more information to decipher on April 2nd, though it may take a few months to have a clear grasp of President Trump’s intentions. Markets, the business community and American households still hold out hope that instability and economic weakening would force the administration to retreat from its aggressive tariff regime. But we’ve seen enough to make some baseline assumptions.
Tariffs are the centerpiece of a radical plan of U.S. reindustrialization and self-sufficiency – fundamental to MAGA. Such a strategy of transformative structural change would unfold over years, marking a momentous reversal of the forces of globalization that have been instrumental in containing consumer and producer prices in the face of historic monetary inflation. From this analytical perspective, the resurrection of “transitory” would seem optimistic, if not imprudent.
“Transitory,” though, retains an outside shot at redemption. Evidence builds by the week that the world is transitioning between cycles. The multi-decade global super boom cycle is faltering, with historic Credit and speculative Bubbles hanging in the balance. Uncertainty is at its most extreme.
The current environment is characterized by an extraordinary interplay of highly complex systems. Acutely fragile global market Bubbles have turned highly unstable. The odds of panics, financial crashes, and crises are uncomfortably high. Bubble economies are increasingly vulnerable to shocks in confidence and disruptions in market-based finance. Wild unpredictability has engulfed politics and geopolitics. The nature of policy responses to market dislocations is highly uncertain.
With already elevated inflation at risk of a tariff and trade-war acceleration, central bankers and their QE cure-all will confront much greater challenges than those previously faced. Will central bankers be slower to respond, providing crisis dynamics a favorable window for strengthening? And are they prepared for the massive QE that would be necessary in the event of a major speculative deleveraging episode? Adding another important layer of complexity, how might today’s weakened global bond markets respond to powerful reflationary QE in an environment prone to upside inflation surprises?
On the subject of unstable markets, it was another interesting week. While the S&P500 rallied 2% from Tuesday’s lows to Wednesday’s intraday highs, equities missed an opportunity for an expiration-assisted rally. Global bond yields dropped. Treasuries again appeared on the receiving end of safe haven flows. And while nothing to write home about, the weakened dollar mustered a gain for the week.
The “periphery” – at home and abroad – is the realm of important developments. The emerging markets (EM) have been bolstered over recent weeks by drops in Treasury yields and the dollar. This respite might have largely run its course. As always, the “periphery” is vulnerable to shifts in market sentiment (risk aversion), waning liquidity, contagion, and crisis dynamics. Moreover, many EM countries suffer festering social and political instability at this perilous super cycle juncture.
March 19 – Financial Times (Ayla Jean Yackley and Andrew England): “For months, events at home and abroad appeared to be moving in Turkish President Recep Tayyip Erdoğan’s favour. Years of fraught relations with Europe were warming as Ankara’s importance as a Nato ally was reinforced by US President Donald Trump’s pivot to Moscow; Turkey’s runaway inflation was cooling; and interest rates, long the bane of Erdoğan, were finally falling… But the darker side of Erdoğan’s rule was simmering in the background as the authorities launched a months-long crackdown against his political opponents, while the veteran leader raged against an ‘opposition problem that poisons democracy’. That reached an extraordinary climax on Wednesday with the arrest of Ekrem İmamoğlu, the popular mayor of Istanbul who is widely considered the most potent politician to challenge Erdoğan since the president came to power in 2002… ‘He has crossed the Rubicon,’ said Suat Kınıklıoğlu, a former MP. ‘There is no going back from here for him.’”
March 20 – Bloomberg (Beril Akman): “President Recep Tayyip Erdogan’s escalation of the campaign against his most prominent political rival came at the expense of Turkey’s market stability. It may be a price he’s willing to pay to clear the path to a third term. Investors took fright at the development… Authorities said banks sold as much as $9 billion to support the lira… ‘What happened is a coup attempt,’ Ozgur Ozel, chairman of the main opposition Republican People’s Party, the CHP, to which Imamoglu belongs, told a rally… ‘This is no longer a case of Ekrem Imamoglu, it is a case of all our people.’”
Political instability erupted in Turkey at the hand of its autocratic and antidemocratic president. The Turkish lira immediately collapsed 12%, though record ($9bn) intervention reduced the day’s loss to 3.2%. Turkey’s central bank boosted short-term rates two percentage points to 46%. Yet the lira’s 3.1% loss was the largest weekly decline in almost two years. Turkish stocks were slammed 16.6%, with “banking stocks experiencing their worst weekly drop since at least 2001” (Bloomberg). Turkey’s local currency bond yield spiked 293 bps to 29.16%. “Turkish Lira Rout Sours Lucrative Carry Trade.” “Turkey’s Erdogan Warns Opposition Over Calls for Mass Protests.”