John Auther’s Points of Return

Excerpt from article,

Points of Return

by John Authers
July 11, 2019

If the Federal Reserve does not cut its target for the federal funds rate by at least 25 basis points at the end of this month, many in the market will feel entitled to sue the central bank for breach of contract. Wednesday’s congressional testimony by Fed Chairman Jerome Powell and the publication of the minutes to the central bank’s last monetary policy meeting were the last chance to walk back the widespread assumption that a July rate cut is a certainty. Powell made no attempt whatever to do so.


Kotok invokes the relevance of the gold standard:

“The reference to Mundell and the trinity provoked a thought as I saw the Chinese continue to acquire gold and pursue what seems to be a gold for USD substitution. China is not alone as we see others like India and Russia pursuing something similar. So my question involves how a gold substitute for USD alters the Mundell construction.

“The recent expansion of negative rate sovereign debt to $14T only adds to the question as gold forward contracts have positive yield. Thus a country using gold as a part of its reserve allocation is incentivized to bias away from fiat currency and add to gold. This is a speculative assertion, of course, but the rising gold price seems to be reflecting the global downward march in interest rates. In a world where 95% of all high grade sovereign debt now yields below the fed funds rate and that rate is expected to fall, shouldn’t we question the Mundell construction? And if we do, isn’t gold reserve accumulation a force which might dampen the stress of Mundell’s trinity?

“Magnus doesn’t consider this option. We ponder the question. Any Thoughts?”

I have a lot of thoughts, although they are not yet well organized. Kotok is right that China is transferring to gold and has stepped up its purchases of late, but this is still on a very small scale. Its official gold assets are now $87 billion, according to the People’s Bank of China. This is a lot of money, but still a tiny proportion of total Chinese reserves of more than $3 trillion

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The Market Expects the Fed to Do Its Duty

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The Market Expects the Fed to Do Its Duty

by John Authers
June 14, 2019

The market expects. President Donald Trump’s threat to impose tariffs on Mexican imports has come and gone, but the market remains convinced that the prospects for the Federal Reserve have changed utterly in the last two weeks. If the fed funds futures market is to be believed, the odds now favor three 25 basis point cuts between now and the end of the year. Nobody gave such an outcome the time of day until a few weeks ago



“Vincero!” Or, Trump Sings Pavarotti

Finally, a moment of inspiration brought to you indirectly by David Kotok of Cumberland Associates, along with a slightly painful memory. Kotok headlined his latest market missive “Turandot,” after Puccini’s last and arguably greatest —  but incomplete —  opera. It is set in China. The analogy works, Kotok says:

“Why do I start a commentary about China and the Trump Trade War by invoking an opera to serve as a metaphor? The reason is that there is a history lesson.

“Puccini wrote the entire opera except for the final duet. He died on November 29, 1924, before completing the text. Franco Alfano was commissioned to complete the opera, but conductor Arturo Toscanini did not like the result. At the opera’s premiere on April 25, 1926, Toscanini stopped in the middle of the third act and announced to the audience, “Here the opera ends, because at this point the maestro died.” (Source: Richard Russell, executive director of Sarasota Opera)

“The operatic drama underway features Trump and Xi. The setting is China and also Washington. Instead of the three riddles of Turandot, we have tweets back and forth between the US and in China. Sadly, though, the current version is not a comic opera. The closing duet is not yet written.”

It does seem to be a good precedent (Trump used the song at campaign events). More concerning, we lack a Toscanini-like figure to call the whole thing off if the conclusion the two leaders come up with is not to his satisfaction.

Perhaps more sadly, however, the trade war so far lacks any high moment of drama to match “Nessun Dorma” (“Nobody will sleep”), the show-stopping aria from “Turandot” that made Pavarotti famous and became the theme song for the 1990 World Cup in Italy.

(Ed note: On February 10, 2006, Luciano Pavarotti made his final public performance at the Opening Ceremony of the Torino 2006 Olympic Winter Games in his home country of Italy. Watch this interpretation of “Nessun Dorma” – from Giacomo Puccini’s opera Turandot)

Read the full article by John Authers at the Bloomberg website:


Trade War’s Hammerlock on Bond Market Puts Lower Yields in Sight

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Trade War’s Hammerlock on Bond Market Puts Lower Yields in Sight

By Liz McCormick
May 18, 2019


Insight Ahead

Next week, traders will gain fresh insight into the state of America’s housing market and purchases of big-ticket items. Minutes from the Fed’s last gathering will be released Wednesday and there’s a slew of speakers, including Chairman Jerome Powell. There’s little expectation that officials will waver from their pledge of patience with rates.

“The Fed will look at the tariffs as an exogenous shock and that it’s not systemic and therefore won’t change monetary policy,” said David Kotok, chief investment officer at Cumberland Advisors, which manages about $3 billion.

Fed funds futures imply the central bank’s benchmark rate will fall to 2.09% by the end of 2019, signifying more than a quarter-point cut. Officials’ most recent quarterly forecasts projected no change in 2019 and a quarter-point increase in 2020.

Given the Fed’s plans for rates and elevated Treasury issuance, Kotok says yields are too low. He expects the 10-year yield to be at 3% to 3.25% by year-end.

Still, the daily ebb and flow of information about tariffs is seen as pivotal.

“There is more risk of yields going lower given the concerns about trade,” said Justin Lederer, a strategist at Cantor Fitzgerald.

Read the full article by Liz McCormick at the Bloomberg website:


SALT-Fueled Rally in Muni Market Faces Tax-Day Test

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SALT-Fueled Rally in Muni Market Faces Tax-Day Test

By Amanda Albright
April 1, 2019

The rally in the $3.8 trillion municipal-bond market is about to face a major tax-season test. All year, analysts have credited the $10,000 cap on state and local tax deductions for driving a record-setting amount of cash into tax-exempt debt as investors look for ways to cut what they owe to the federal government. The wave of money helped propel a five-month rally that’s pushed yields on some municipal bonds to the lowest against Treasuries since at least 2001.

“The demand side has been big,” John Mousseau, chief executive officer and president of Cumberland Advisors, said in an interview. “The market is a little bit vulnerable to a backup in yields and a bit of a selloff.”


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