This was the title of my last Global Macro Insight.
Here some quotes :
“The title of course refers to the MOVE Index (the VIX of US Treasury bonds). The first graph that your scribe wishes to share this morning concerns the concomitance of the rise in the balance sheet of the FED with that of the MOVE Index”
“In 2020, the MOVE shift upwards caused the financial markets to fall and the Fed’s response, flooding the markets with trillions of dollars …
There are two interpretations of this graph.
- Either the FED can no longer control the MOVE, and the rise in its balance sheet will not calm the volatility on Treasuries, causing a VaR Shock, then a Volatility Shock.
- Either the FED has decided to be more reactive in order to calm from the start any hint of appreciation of MOVE”
“But your scribe wants to point out that nominal GDP growth in the 1970s was higher than the average rate at 10Y, causing the PCE to explode to + 6% … This correlation (or its inverse) is true over all periods except the last decade due to the intervention of central banks … But the end of the last decade has nothing to do with how it started, as the world economy rolled out of GFC. It should also be noted that the average rate of growth, during this period, is the lowest of all the post-war decades, as the FED poured out trillions of liquidities.”
“But, by boosting the monetary velocity of an economy, already flooded with liquidities, with new liquidities, we have all the parameters for an uncontrolled take-off of inflation. It should also be noted that ESG, climate change, and the disruption of the global supply chain, caused by the new Cold War between the United States and China, are also inflationary parameters.
Your scribe has always been against deflationary monetary policies. They destroy the value of labor and money. Inflation is an incredibly good thing when it includes wages, but it always goes through acceleration episodes that are often damaging to financial markets and economies if the Hyperinflation regime sets in over time.”
I wrote this Friday morning at 5 am CET… On Friday, the US 10Y skyrocketed to 1.35% and the MOVE Index moved up fast!!!
Next week will be THE week for financial markets. 3 squeezes must not implode : the short dollar, the short volatility, and the long US 10Y… The two latter could blast at the same time… In addition, the FED asked to banks in the last stress tests to integrate a 55% drop in Equity markets…
March could become a challenging month in the US, but also in Europe. The British, Brazilian, and Sud Af strains could derail the vaccinations campaigns…
Stay Barbell