Wolf Richter in Conversation with Saxo Bank’s Market Call

The US economy, financial markets, and inflation amid the distortions caused by fiscal and monetary responses to the pandemic, the shifts that already occurred, and what might happen as stimulus fades. With Saxo Market Call host John Hardy.

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  21 comments for “Wolf Richter in Conversation with Saxo Bank’s Market Call

  1. Michael Gorback says:

    Regarding inflation, how do you reconcile your prediction of long term inflation with the recent 2 year, 5 year and 7 year auctions?

    The credit market isn’t stupid.

    There were a couple of references to what will happen when the stimulus checks stop but the topic wasn’t explored. One was early in the interview and the other was at the end.

    Who says they’ll stop?

    The discussion about outdoor dining in SF was amusing. I was there recently and the first day I ate outside, which as Wolf said, has become popular there. It was hilarious. People wore parkas and wool hats, even wrapped themselves in blankets. You had to wear a mask to speak with the host/hostess and and then you took it off after passing the magic boundary and sat down. The attitude seemed to be “Dammit, I’m going out to eat and I don’t care what it takes!”

    I don’t know about inflation in wine, but I went to Napa for some wine tasting. For between $30-$60 (at least where I went) you got 5 glasses to sample. But not 5 real glasses, about what I’d say was a tablespoon or two. WTF Wolf? Has it always been like that or is it inflation? Or is the long boring lecture before each taste about hints of blackberries, walnut, smoke and burning asphalt part of the price?

    See? I stayed awake for the whole podcast this time.

    • Wolf Richter says:

      Michael Gorback,

      Concerning your first sentence, you’re getting stuff confused. The credit market is dominated by the Fed. The Fed holds $8 trillion of credit instruments in its portfolio. The Fed represses short-term interest rates directly, and long-term interest rates via QE.

      If you look at the credit market for inflation, all you see is Fed activity, not inflation. Everyone knows this. The entire credit market knows this. The credit market is NOT a prediction of inflation but of what they think the Fed might do.

      • Wolf Richter says:

        And yes, dinner with you and Chris was very nice!!

        There were times when I was a lot colder in mid-day August in Texas sitting in shorts and T-shirt in an air-conditioned restaurant, than I was sitting properly dressed in the wind in San Francisco :-]

        • Michael Gorback says:

          So your thesis is that the strong auctions were due to Fed machinations or the public’s anticipated Fed actions?

          There’s a disconnect here.

          No other explanation at all, such as a belief that long term inflation is not a concern? Perhaps the end of the the mortgage and rent moratorium will be deflationary?

          If they stop stimulus checks what happens to inflation? I was disappointed that they didn’t bring it up during the interview. Just about everything seems to be because of stimulus checks- paying down credit cards, buying houses, buying cars. So if those stop then what happens?

        • Wolf Richter says:

          To your point #1: The Fed is buying $80 billion in Treasuries a month. Over the past three months = $240 billion. This roughly matched the total increase in all Treasuries outstanding over those three months. In other words, the Fed bought about the entire increase of the Treasury debt outstanding over the past three months. Everyone else had to scramble. There is no “stretch.”

          This is in part why the Fed is doing $485 billion in reverse repos – effectively taking in $485 billion in liquidity and supplying the market with $485 billion in Treasury securities.

          To your point #3: Good question. Yes, it’s a possibility. My take is that once the “inflationary mindset” is active, consumer price inflation can easily spiral up. Consumer price inflation is in part a psychological phenomenon; consumers could crack down on inflation on their own by going on a collective buyers’ strike to bring down prices, and often they do, but once the inflationary mindset takes over, they don’t.

          So when the stimulus fades, some of the WTF spikes will likely unwind partially (used vehicle prices, for example), but after the brief and partial unwind of a WTF spike, the inflationary mindset will see good deals in those somewhat reduced prices, demand at higher prices resumes, and then carries price increases forward.

          If the Fed gets worried about inflation, it will raise rates and run off its balance sheet to trigger that psychological effect amid consumers that undoes the inflationary mindset. Derailing this inflationary mindset can be an arduous process that ends up causing a big sell-off and a recession. But this is why the Fed is paying attention to various measures of “inflation expectations” (part of the inflationary mindset) among consumers.

        • RightNYer says:

          Thanks Wolf. But wouldn’t an increase in $240 billion in outstanding treasury bills over 3 months mean that MORE than $240 billion was actually issued, as some presumably matured?

        • Wolf Richter says:

          It means a lot of old maturing debt was replaced by new debt, for example a bond fund redeems $10 million in maturing debt and then uses the proceeds to buy $10 million in new debt. Rolling over debt like this is standard procedure and automated. You can do that too in our account with the Treasury or with a broker.

          And then there was $240 billion in additional debt that didn’t replace anything. Just new borrowing that increased the total debt by $240 billion.

      • RightNYer says:

        So you’re saying that “investors” are buying treasuries at yields way below they’re really willing to take because they assume they can flip it to the Fed?

        • Michael Gorback says:

          This last auction the yield was lower than last month.

          80% of the purchases were either direct or indirect, and only 20% went to dealers.

          So 80% was purchased by foreign entities or for private holdings.

          I don’t see where the Fed comes into this. I’m definitely lost in the weeds.

        • Wolf Richter says:

          See my comment above. You don’t need to be lost in the woods :-]

    • VintageVNvet says:

      Can’t say much about the rest of your comment MG, but damn sure can reply to the question re escalation of cost of wine tasting:
      Years ago, late 60s, cousin in SoCal decided to take up wine drinking ( and sharing to be clear ) as his hobby, and began to explore/ taste / buy cases at a time to the point where he had to excavate his crawl space for a proper wine cellar with room for the hundreds of bottles…
      Whenever he felt like it, he would call me to pick him up at SFO and drive to Napa area; he had invitations, eventually to all the major wineries as well as some of the, at least then, lesser known ones.
      In every case, there were tables laden with every wine by that company, along with tons and tons of snack type foods of the very best quality, etc.
      All free…
      Years later, I went to the public offerings of some of those wineries, and that too was free, at least up until the later part of the 70s/early 80s.

      • NBay says:

        Roughly 72-74′ we were taking bikes with GFs (just easy Freeway cruising) up to Italian Swiss at Asti where they let us drink all we wanted. One could even sample only their Easy Days, Mellow Nights, or whatever over and over if they wanted, as long as we behaved….totally free. Our first stop, Windsor Vineyards was much shorter, but still all free. No invitations needed at either winery.
        So, yeah, wine inflation exists.

    • historicus says:

      “The credit market isn’t stupid.”

      It’s not a “market”…..it is an arrangement run by the Fed.
      Supply / Demand price discovery does not exist in this biosphere.

  2. raxadian says:

    Inflation goes up if debt goes up and if money printing goes up. Both things have been happening a lot in the USA.

    The vaccines, the subsides and so on aren’t really free.

  3. Stupid says:

    The Fed policy and the national debt are done on purpose. They know what they are doing. This has long been planned. But in their blind arrogance academics underestimate the rednecks. Pragmatists always win and the idealists in their dream world always lose, We are not Europeans. Continental philosophy will not work here as it has in Europe. There will be an interesting show at the end of this June.

    • Pea Sea says:


      • NBay says:

        Pea Sea-

        Takes many many hundreds of hours of talk radio to really “get it”, once “got”, then I guess it all makes “sense”…..may not be your cup of tea.

  4. Stupid says:

    What we are seeing in the USA is summed in the words “Shirt sleeve to shirt sleeve”. And also the word “venality”. The reinvention of the wheel is inevitable. What we are seeing is a greater cycle in morals. Oswald Spengler. 4th turning. Spare the rod, spoil the child. Thank you Dr Spock.

  5. GotCollateral says:

    and here i was thinking we were going to explore the collateral side of RREPO and finally expand the conversation away from the cash side … because Saxo Bank … but nope …

  6. Old School says:

    It’s hard to get your head around it all. If Fed controls pricing of all the world’s assets (estimated to be $500 trillion) through dominating the treasury market then they own it so to speak.

    It’s one thing possibly to dominate the financial markets during a world war crisis, but dominating a representative democracy in peace time seems like a huge mistake that history tells us has a poor outcome.

  7. Auldyin says:

    The Fed prints the dollars and the Govt spends them in the economy via Treasuries so, of course, the net debt has to constantly expand over time otherwise demand would cease to grow and inbuilt deflation would take over again a la Japan. They have to run, to stay in the same place, and there is no obvious barrier to why this process cannot go on forever.
    It can only be cured by proper productive investment and productivity growth (ie more US output per capita).
    Wake me up if you see that on the horizon any time soon.
    It’s not just the US, it’s all ‘advanced’ economies.
    A low interest stagnation paradigm?

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